FIRST CITIZENS BANCSHARES, INC. 
Management's discussion and analysis ("MD&A") of earnings and related financial
data are presented to assist in understanding the financial condition and
results of operations of First Citizens BancShares, Inc. ("BancShares") and its
banking subsidiary, First-Citizens Bank & Trust Company ("FCB"). This discussion
and analysis should be read in conjunction with the audited consolidated
financial statements and related notes presented within this Annual Report on
Form 10-K. Intercompany accounts and transactions have been eliminated. See Note
A, Accounting Policies and Basis of Presentation, in the Notes to the
Consolidated Financial Statements included in Part II, Item 8, of this Annual
Report on Form 10-K for more detail. Although certain amounts for prior years
have been reclassified to conform to statement presentations for 2020, the
reclassifications had no effect on shareholders' equity or net income as
previously reported. Unless otherwise noted, the terms "we," "us," "our," and
"BancShares" in this section refer to the consolidated financial position and
consolidated results of operations for BancShares.
Year-over-year comparisons of the financial results for 2019 and 2018 are
contained in Item 7 of BancShares' Annual Report on Form 10-K for 2019 filed
with the Securities and Exchange Commission ("SEC") on February 26, 2020 and
available through FCB's website www.firstcitizens.com or the SEC's EDGAR
database.
FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K includes statements and exhibits
relating to plans, strategies, economic performance and trends, projections of
results of specific activities or investments, expectations or beliefs about
future events or results and other statements that are not descriptions of
historical facts may be forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements may be identified by terms such as "may," "will,"
"should," "could," "expects," "plans," "intends," "anticipates," "believes,"
"estimates," "predicts," "forecasts," "projects," "potential" or "continue," or
similar terms or the negative of these terms, or other statements concerning
opinions or judgments of BancShares' management about future events.
Forward-looking information is inherently subject to risks and uncertainties,
and actual results could differ materially from those currently anticipated due
to a number of factors which include, but are not limited to, risks,
uncertainties and other factors relating to our proposed merger with CIT Group
Inc. ("CIT"), including the ability to obtain regulatory approvals and satisfy
other conditions to the proposed transaction, and delay in closing the proposed
transaction, as well as risks, uncertainties and other factors relating to the
impact of COVID-19 on our business and the economy, the financial success or
changing strategies of our customers, customer acceptance of our services,
products and fee structure, the competitive nature of the financial services
industry, our ability to compete effectively against other financial
institutions in our banking markets, actions of government regulators, the level
of market interest rates and our ability to manage our interest rate risk,
changes in general economic conditions affecting our loan and lease portfolio,
the abilities of our borrowers to repay their loans and leases, the values of
real estate and other collateral, the impact of our prior acquisitions, the
risks discussed in Item 1A. Risk Factors above and other developments or changes
in our business that we do not expect.
Actual results may differ materially from those expressed in or implied by any
forward-looking statements. Except to the extent required by applicable law or
regulation, BancShares undertakes no obligation to revise or update publicly any
forward-looking statements for any reason.
CRITICAL ACCOUNTING ESTIMATES
The accounting and reporting policies of BancShares are in accordance with
accounting principles generally accepted in the United States of America
("GAAP") and are described in Note A, Accounting Policies and Basis of
Presentation, of the Notes to the Consolidated Financial Statements. The
preparation of financial statements in conformity with GAAP requires us to
exercise judgment in determining many of the estimates and assumptions utilized
to arrive at the carrying value of assets and liabilities and amounts reported
for revenues and expenses. Our financial position and results of operations
could be materially affected by changes to these estimates and assumptions.
The following is a summary of the more critical areas where these critical
assumptions and estimates could impact the financial condition, results of
operations and cash flows of BancShares:
Allowance for credit losses. As of January 1, 2020 , BancShares adopted Financial
Accounting Standards Board ("FASB") Accounting Standard Update ("ASU") 2016-13
Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments ("ASC 326"), which changed the methodology, accounting
policies and inputs used in determining the allowance for credit losses ("ACL").
See Note A, Accounting Policies and Basis of Presentation, in the Notes to
Consolidated Financial Statements for discussion of our accounting policies for
the ACL and the implementation impact of
25
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ASC 326. See Note E, Allowance for Credit Losses, in the Notes to Consolidated
Financial Statements for additional disclosures.
The ACL represents the best estimate of expected credit losses on loans and
leases as of the balance sheet date. The ACL is assessed at each balance sheet
date and adjustments are recorded in provision for credit losses. Losses are
estimated using historical loss rates and a projection of a reasonable and
supportable macroeconomic forecast period which reverts to historical
assumptions. This estimation process requires judgment in determining the amount
and timing of charge-offs, economic forecast assumptions and loan specific
attributes impacting the borrower's ability to repay contractual obligations.
Other factors such as the composition of and risks within the loan portfolio,
collateral values and prepayments are also considered. Loan balances considered
uncollectible are charged off against the ACL. If it is probable a borrower will
be unable to pay all amounts due according to the contractual terms of the loan
agreement and a loss is probable, a specific valuation allowance is determined.
Recoveries of amounts previously charged-off are generally credited to the ACL.
Financial Measurements. Fair value is the price that could be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants as of the measurement date. Certain assets and liabilities
are measured at fair value on a recurring basis. Examples of recurring uses of
fair value include marketable equity securities, investment securities available
for sale and loans held for sale. There were no liabilities measured at fair
value on a recurring basis at December 31, 2020 . We also measure certain assets
at fair value on a non-recurring basis. Examples include collateral-dependent
loans, other real estate owned ("OREO"), goodwill and intangible assets. Assets
acquired and liabilities assumed in a business combination are recognized at
fair value as of the acquisition date.
Fair value is determined using different inputs and assumptions based upon the
instrument being valued. Where observable market prices from transactions for
identical assets or liabilities are not available, we identify market prices for
similar assets or liabilities. If observable market prices are unavailable or
impracticable to obtain for any such similar assets or liabilities, we look to
other modeling techniques, which often incorporate unobservable inputs which are
inherently subjective and require significant judgment. Fair value estimates
requiring significant judgments are determined using various inputs developed by
management with the appropriate skills, understanding and knowledge of the
underlying asset or liability to ensure the development of fair value estimates
is reasonable. Typical pricing sources used in estimating fair values include,
but are not limited to, active markets with high trading volume, third-party
pricing services, external appraisals, valuation models and commercial and
residential evaluation reports. In certain cases, our assessments, with respect
to assumptions market participants would make, may be inherently difficult to
determine, and the use of different assumptions could result in material changes
to these fair value measurements. See Note P, Estimated Fair Values, and Note B,
Business Combinations, in the Notes to Consolidated Financial Statements for
additional disclosures regarding fair value.
Income taxes. Management estimates income tax expense using the asset and
liability method. Under this method, deferred tax assets and liabilities are
recognized for future tax consequences attributable to differences between the
amount of assets and liabilities reported in the consolidated financial
statements and their respective tax bases. In estimating the liabilities and
corresponding expense related to income taxes, management assesses the relative
merits and risks of various tax positions considering statutory, judicial and
regulatory guidance. Because of the complexity of tax laws and regulations,
interpretation is difficult and subject to differing judgments. Accrued income
taxes payable represents an estimate of the net amounts due to or from taxing
jurisdictions based upon various estimates, interpretations and judgments.
We evaluate our effective tax rate on a quarterly basis based upon the current
estimate of net income, the favorable impact of various credits, statutory tax
rates expected for the year and the amount of tax liability. We file tax returns
in relevant jurisdictions and settle our return liabilities.
Changes in estimated income tax liabilities occur periodically due to changes in
actual or estimated future tax rates and projections of taxable income,
interpretations of tax laws, the complexities of multi-state income tax
reporting, the status of examinations conducted by various taxing authorities
and the impact of newly enacted legislation or guidance as well as income tax
accounting pronouncements. See Note O, Income Taxes, in the Notes to
Consolidated Financial Statements for additional disclosures.
26
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CURRENT ACCOUNTING PRONOUNCEMENTS
Table 2 details ASUs issued by the FASB adopted in 2020. See Note A, Accounting
Policies and Basis of Presentation, in the Notes to the Consolidated Financial
Statements for more detail on the impact on the consolidated financial
statements.
Table 2
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Standard Date of Adoption
ASU 2016-13 - Financial Instruments-Credit Losses (Topic 326): Measure of
Credit Losses on Financial Instruments (including all subsequent ASUs on this January 1, 2020
topic)
ASU 2017-04 - Intangibles - Goodwill and Other (Topic 350): Simplifying the January 1, 2020
Test for Goodwill Impairment
ASU 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - December 31, 2020 Requirements for Defined Benefit Plans EXECUTIVE OVERVIEW BancShares conducts its banking operations through its wholly owned subsidiary FCB, a state-chartered bank organized under the laws of the state ofNorth Carolina . BancShares' earnings and cash flows are primarily derived from our commercial and retail banking activities. We gather deposits from retail and commercial customers and we secure funding through various non-deposit sources. We invest the liquidity generated from these funding sources in interest-earning assets, including loans, investment securities and overnight investments. We also invest in bank premises, computer hardware and software and furniture and equipment used to conduct our commercial and retail banking business. We provide treasury management services, cardholder and merchant services, wealth management services and other products and services typically offered by commercial banks. The fees generated from these products and services are a primary source of noninterest income and an essential component of our total revenue. Our strong financial position enables us to pursue growth through strategic acquisitions to enhance organizational value by providing opportunities to grow capital and increase earnings. These transactions allow us to strengthen our presence in existing markets as well as expand our footprint into new markets. With interest rates at historical lows, our ability to generate earnings and shareholder value has been challenging. While our balance sheet is asset sensitive overall, we seek to reduce volatility and minimize the risk to earnings from interest rate movements in either direction. Additionally, our initiatives focus on growth of noninterest income sources, management of noninterest expenses, optimization of our branch network and further enhancements to our technology and delivery channels. In lending, we continue to focus our activities within our core competencies of retail, small business, medical, commercial and commercial real estate lending to build a diversified portfolio. Our low to moderate risk appetite continues to govern all lending activities. We also pursue noninterest income through enhanced credit card offerings and wealth management and merchant services. We have recently redesigned our credit card programs to offer more competitive products, intended to both increase the number of accounts and frequency of card usage. Enhancements include more comprehensive reward programs and improved card benefits. In wealth management, we have broadened our products and services to better align with the specialized needs and desires of those customers. Services include holistic financial planning, business owner advisory services and enhanced private banking offerings. Our goals are to increase efficiencies and control costs while effectively executing an operating model that best serves our customers' needs. We seek the appropriate footprint and staffing levels to take advantage of the revenue opportunities in each of our markets. Management is pursuing opportunities to improve operational efficiency and increase profitability through expense control, while continuing enterprise sustainability projects to improve the operating environment. Such initiatives include the automation of certain manual processes, elimination of duplicated and outdated systems, enhancements to existing technology, implementation of new digital technologies, outsourcing to third party service providers and actively managing personnel expenses and discretionary spending. We routinely review vendor agreements and third party contracts for cost savings. 27 -------------------------------------------------------------------------------- Recent Economic and Industry Developments During the first quarter of 2020, a novel strain of coronavirus ("COVID-19") spread throughout the world, causing significant disruptions to the domestic and global economies which continue to date. In response to the outbreak, governments have imposed restrictions resulting in business shutdowns, regional quarantines, disruptions of supply chains, changes in consumer behavior and overall economic instability. This uncertainty has led to volatility in the financial markets. This impact was coupled with spikes in unemployment as a result of business shutdowns that continue to impact financial institutions operationally and financially. For a discussion of the risks we face with respect to the COVID-19 pandemic, the associated economic uncertainty, the steps taken to mitigate the pandemic and the resulting economic contraction, see Item 1A. Risk Factors in Part I of this Annual Report on Form 10-K. Various external factors influence the focus of our business efforts and the results of our operations can change significantly based on those external factors. Based on the latest real gross domestic product ("GDP") information available, theBureau of Economic Analysis' revised estimate of fourth quarter 2020 GDP growth was 4.0%, up from 2.1% GDP growth in the fourth quarter 2020. The acceleration in real GDP in the fourth quarter reflected increases in exports, nonresidential fixed investment, personal consumption expenditures, residential fixed investment, and private inventory investment that were partly offset by decreases in state and local government spending and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased. The increase in fourth quarter GDP reflected both the continued economic recovery from the sharp declines earlier in the year and the ongoing impact of the COVID-19 pandemic, including new restrictions and closures that took effect in some areas ofthe United States . The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the fourth quarter of 2020 because the impacts are generally embedded in source data and cannot be separately identified. OnMarch 27, 2020 , the Coronavirus Aid Relief and Economic Security Act (the "CARES Act") was passed. The bill was designed to provide short-term economic relief to individuals and businesses most impacted by the fallout of the pandemic. Key provisions include: for individuals, economic impact payments and enhanced unemployment benefits; for small businesses, access to loans and support through the Small Business Administration Paycheck Protection Program ("SBA-PPP"), direct aid and loans to the medical industry and other affected sectors, and certain tax benefits that can be used in conjunction with the other aid mentioned. While direct aid to financial services entities is not a primary goal of the provisions, financial institutions will function to transmit funds from theFederal Reserve , SBA andUnited States (the "U.S.")Treasury to the public. This was supplemented by the Paycheck Protection Program Flexibility Act, which was signed into law onJune 5, 2020 and amended provisions of the SBA-PPP including timing of the program and changes to forgiveness criteria. Additionally, the Consolidated Appropriations Act 2021 was signed into law onDecember 27, 2020 , and contained provisions for new funding of SBA-PPP loans. We began accepting applications for this round of funding in the first quarter of 2021. There were other regulatory actions taken that may impact our business including changes in credit reporting on customer forbearance, federally backed mortgage forbearance, potential legal lending limit relaxation and other economic stabilization efforts. Further legislation is expected as the government continues to mitigate the economic impact on the crisis. TheU.S. unemployment rate increased from 3.5% inDecember 2019 to 6.7% inDecember 2020 . According to theU.S. Department of Labor , nonfarm payroll employment declined 9.2 million in 2020, compared to growth of 2.1 million in 2019. During the first quarter of 2020, theFOMC lowered the federal funds rate to a target range of 0.00% to 0.25%. TheFOMC cited the effects of COVID-19 on economic activity and the risks posed to the economic outlook. TheFOMC expects to maintain this target range until labor market conditions have reached levels consistent with theFOMC's assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time. TheU.S. Census Bureau and theDepartment of Housing and Urban Development's latest estimate for sales of new single-family homes inDecember 2020 was at a seasonally adjusted annual rate of 842,000, up 15.2% from theDecember 2019 estimate of 731,000. Purchases of existing homes in 2020 are also up 5.6% from a year ago. Similar to the economic environment, the performance trends in the banking industry are mixed, as shown in the latest national banking results from the third quarter of 2020.FDIC -insured institutions reported a 10.7% decrease in net income compared to the third quarter of 2019 primarily a result of lower interest rates. Loan-loss provisions increased by 3.5% while noninterest expense rose by 3.0% from a year earlier. Banking industry average net interest margin ("NIM") was 2.68% in the third quarter of 2020, down from 3.35% in the same quarter a year ago primarily due to a decline in interest-earning asset yields. Total loans increased by 4.9% over the past twelve months primarily due to growth in commercial and industrial loans. Total deposits increased 19.9%, largely driven by government stimulus. 28 -------------------------------------------------------------------------------- BANCSHARES' COVID-19 CONTINUED MONITORING AND RESPONSE We remain in a strong capital and liquidity position providing stability in navigating the COVID-19 crisis. Our leadership team continues to work to identify and enact appropriate measures in an effort to protect the welfare of our employees and soundness of the organization, while continuing to support our customers. A significant majority of our branches have re-opened with enhanced safety protocols and our corporate locations remain at limited occupancy due to current virus trends. ThroughDecember 31, 2020 , we granted over 22,000 COVID-19 related loan extensions, representing loan balances of approximately$6.31 billion . Of these extensions, over 97% of have begun repayment. Delinquency trends among loans entering repayment are in line with the remainder of the portfolio. We have not seen significant declines in overall credit quality, though the impacts of the SBA-PPP and payment extensions could be delaying signs of credit deterioration. During 2020, we originated over 23,000 SBA-PPP loans with an original balance of over$3.2 billion and an outstanding balance of$2.4 billion atDecember 31, 2020 . We have collected all$117.2 million in SBA-PPP related loan fees per the program terms. These fees were deferred and are being recognized in interest income over the life of the respective loans. SBA-PPP loans have a stated rate of 1.00%, but with the accretion of these fees, the average yield on the portfolio was 4.33% for 2020. As ofDecember 31, 2020 , remaining net deferred fees were$41.1 million . Table 3 SBA-PPP LOANS BY LOAN SIZE (Dollars in thousands) Loan Size $ of Loans % of Loans $ Less than$150,000 $ 688,354 28.6 %$150,000 to$2,000,000 1,236,448 51.4 Greater than$2,000,000 481,489 20.0 Total$ 2,406,291 100.0 % We began accepting and processing applications for forgiveness during the third quarter of 2020. Table 4 represents the forgiveness status of SBA-PPP loans as ofDecember 31, 2020 . Table 4 SBA-PPP LOAN FORGIVENESS STATUS (Dollars in thousands) Forgiveness Status $ of Loans % of Total Received by FCB$ 1,384,859 43.1 % Submitted to SBA 1,190,171 37.1 Approved by SBA 746,643 23.3 Funds Received 746,442 23.2 To date, we have received over 7,200 forgiveness decisions from the SBA, representing approximately$1.0 billion in forgiveness payments. The Consolidated Appropriations Act 2021 was signed into law during the fourth quarter of 2020 and contained provisions for new funding of SBA-PPP loans. We began accepting applications for this round of funding inJanuary 2021 and have funded over$670 million of loans to date. Strong Liquidity and Capital Position We maintain a strong level of liquidity. As ofDecember 31, 2020 , liquid assets (available cash and unencumbered high quality liquid assets at market value) totaled approximately$9.63 billion representing 19.8% of consolidated assets as ofDecember 31, 2020 . In addition to liquid assets, we had contingent sources of liquidity totaling approximately$11.90 billion in the form ofFederal Home Loan Bank ("FHLB") borrowing capacity, Federal Reserve Discount Window availability, federal funds lines and a committed line of credit. AtDecember 31, 2020 , our regulatory capital ratios were well in excess ofBasel III capital requirements. 29 -------------------------------------------------------------------------------- FINANCIAL PERFORMANCE SUMMARY Income Statement Highlights For the year endedDecember 31, 2020 , net income was$491.7 million , or$47.50 per share, compared to$457.4 million , or$41.05 per share, during 2019. The return on average assets was 1.07% during 2020, compared to 1.23% during 2019. The return on average shareholders' equity was 12.96% and 12.88% for the respective periods. The$34.3 million , or 7.5% increase in net income was primarily the result of the net effect of the following: •Net interest income for the year ended 2020 increased$76.8 million , or by 5.9%, compared to the year ended 2019. The increase was due to loan growth driven largely by SBA-PPP balances, partially offset by a decrease in interest-earning asset yields. •The taxable-equivalent net interest margin was 3.17% for the year ended 2020, a decrease of 57 basis points from the year ended 2019. The decrease was primarily due to a decline in yield on interest-earning assets coupled with an increase in total borrowings, partially offset by a decline in the rate paid on interest-bearing deposits. •We recorded provision for credit losses of$58.4 million in 2020, compared to$31.4 million in 2019. Provision expense includes$36.1 million of reserve build for credit losses specifically related to the uncertainty surrounding COVID-19 and considers the potential impact of slower economic activity and elevated unemployment, as well as potential mitigants due to government stimulus and loan accommodations. The net charge-off to loans ratio was 0.07% for the year, down 4 basis points from 2019. •Noninterest income for the year ended 2020 was$476.8 million , an increase of$60.9 million , or 14.6%, from the prior year. Fair value adjustments on marketable equity securities and realized gains on available for sale securities increased by a combined$61.9 million . Mortgage income increased by$18.5 million due to increased production and sales resulting from lower mortgage interest rates. These positive impacts were partially offset by a decline in service charges on deposits of$17.5 million due to lower volume with increased deposit balances and an increase in waived fees to aid our customers during the COVID-19 pandemic. •Noninterest expense was$1.19 billion for the year endedDecember 31, 2020 , compared to$1.10 billion for the same period in 2019. This 7.7% increase was primarily attributable to higher personnel expenses and processing fees paid to third parties reflecting continued investment in digital and technological capabilities. •Income tax expense was$126.2 million and$134.7 million for the years ended 2020 and 2019, respectively, representing effective tax rates of 20.4% and 22.7%. The decline in the effective tax rate related primarily to the decision to utilize an allowable alternative for computing our 2020 federal income tax liability. The allowable alternative provided us the ability to use the federal income tax rate for certain current year deductible amounts related to prior yearFDIC -assisted acquisitions that was applicable when these amounts were originally subjected to tax. Balance Sheet Highlights •During 2020, loans increased by$3.91 billion , or by 13.5% to$32.79 billion . Of this growth,$2.41 billion was related to SBA-PPP loans. Excluding SBA-PPP loans and loans from acquisitions, total loans increased$1.40 billion sinceDecember 31, 2019 , or by 4.9%. •The allowance for credit losses as a percentage of total loans was 0.68% atDecember 31, 2020 , compared to 0.78% atDecember 31, 2019 . AtDecember 31, 2020 , BancShares' nonperforming assets, including nonaccrual loans and OREO, increased$74.1 million to$242.4 million or 0.74% of total loans from$168.3 million or 0.58% of total loans atDecember 31, 2019 . Of the increase in nonperforming assets,$24.9 million related to the transfer of loans in performing PCI pools to nonaccrual status under the adoption of ASC 326. A majority of the remainder of the increase related to increases within our acquired residential real estate loan portfolio. •Deposit growth continued in 2020, up$9.00 billion , or by 26.1% to$43.43 billion . This growth includes estimated deposits of$0.93 billion related to the SBA-PPP and deposits from acquisitions of$203.2 million . Excluding the impact of these deposits, total deposits increased$7.87 billion sinceDecember 31, 2019 , or by 22.9%. •During the first quarter of 2020, BancShares successfully completed a$695 million capital raise which consisted of$350 million of subordinated notes and$345 million of depositary shares (the "Depositary Shares") each representing a 1/40th interest in a share of our 5.375% Non-Cumulative Perpetual Preferred Stock, Series A, par value$0.01 per share. 30 -------------------------------------------------------------------------------- Capital Highlights •In 2020, we returned$364.5 million of capital to shareholders through the repurchase of 813,090 shares of Class A common stock and cash dividends to common and preferred shareholders. •Total shareholders' equity increased from$3.59 billion onDecember 31, 2019 to$4.23 billion onDecember 31, 2020 . The increase was primarily due to earnings and the net proceeds of the issuance of the Depositary Shares, partially offset by share repurchases and dividends during the year. •Under Basel III capital requirements, BancShares remained well-capitalized atDecember 31, 2020 , with a total risk-based capital ratio of 10.61%, Tier 1 risk based capital ratio of 13.81%, common Tier 1 ratio of 11.63%, Tier 1 leverage capital ratio of 7.86% and a capital conservation buffer of 5.6%. 31 -------------------------------------------------------------------------------- BUSINESS COMBINATIONS Recently Announced Business Combinations CIT Group Inc. OnOctober 15, 2020 , BancShares and CIT entered into the Merger Agreement by and among BancShares, FCB, the Merger Sub, and CIT, the parent company ofCIT Bank . Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub and CIT will ultimately merge with and into FCB, with FCB as the surviving entity. The Merger Agreement further provides that immediately following the consummation of the Mergers,CIT Bank will merge with and into FCB, with FCB as the surviving bank. Subject to the fulfillment of customary closing conditions, the parties anticipate that the Transaction will close in the first half of 2021. Completed Business Combinations We evaluated the financial statement significance for all business combinations completed during 2020 and 2019 and concluded the completed business combinations noted below are not material to BancShares' financial statements, individually or in aggregate, and therefore, pro forma financial data is not included.Community Financial Holding Co. Inc. OnFebruary 1, 2020 , we completed the merger ofDuluth, Georgia -basedCommunity Financial Holding Company, Inc. ("Community Financial") and its bank subsidiary,Gwinnett Community Bank , into FCB. Under the terms of the agreement, total cash consideration of$2.3 million was paid to the shareholders of Community Financial. The merger allowed us to expand our presence and enhance banking efforts inGeorgia . The merger contributed$222.1 million in consolidated assets, which included$686 thousand of goodwill,$134.0 million in loans, and$209.3 million in deposits.Entegra Financial Corp. OnDecember 31, 2019 , we completed the merger ofFranklin, North Carolina -basedEntegra Financial Corp. ("Entegra") and its bank subsidiary,Entegra Bank . Under the terms of the agreement, cash consideration of$30.18 for each share of common stock was paid to the shareholders of Entegra, totaling approximately$222.8 million . The merger allowed us to enhance banking efforts and expand our presence in westernNorth Carolina . As part of the transaction, we agreed to divest certain branches, other assets and liabilities as a requirement of regulatory approval. The merger contributed$1.73 billion in consolidated assets, which included$1.03 billion in loans, and$1.33 billion in deposits. OnApril 17, 2020 , we completed the divestiture of the branches including loans and leases, premises and equipment and total deposits with a fair value of$110.1 million ,$2.1 million and$184.8 million , respectively. The divestiture included an 8% premium for deposits acquired that was applied as a reduction of goodwill generated as part of the merger with Entegra.First South Bancorp, Inc. OnMay 1, 2019 , we completed the merger ofSpartanburg, South Carolina -basedFirst South Bancorp, Inc. ("First South Bancorp ") and its bank subsidiary,First South Bank . Under the terms of the agreement, cash consideration of$1.15 for each share of common stock was paid to the shareholders ofFirst South Bancorp , totaling approximately$37.5 million . The merger allowed us to expand our presence and enhance banking efforts inSouth Carolina . The merger contributed$253.0 million in consolidated assets, which included$179.2 million in loans, and$207.6 million in deposits, as of the merger date.Biscayne Bancshares, Inc. OnApril 2, 2019 , FCB completed the merger ofCoconut Grove, Florida -basedBiscayne Bancshares, Inc. ("Biscayne Bancshares") and its bank subsidiary,Biscayne Bank . Under the terms of the agreement, cash consideration of$25.05 for each share of common stock was paid to the shareholders ofBiscayne Bancshares , totaling approximately$118.9 million . The merger allowed us to expand our presence inFlorida and enhance banking efforts inSouth Florida . The merger contributed$1.08 billion in consolidated assets, which included$863.4 million in loans, and$786.5 million in deposits, as of the merger date. See Note B, Business Combinations, in the Notes to Consolidated Financial Statements for additional disclosures. 32 -------------------------------------------------------------------------------- FDIC-ASSISTED TRANSACTIONS Between 2009 and 2017, we completed fourteenFDIC -assisted transactions with a carrying value of loans acquired in these transactions of approximately$410.4 million atDecember 31, 2020 . Nine of the fourteenFDIC -assisted transactions included shared-loss agreements that protected us from a substantial portion of the credit and asset quality risk we would otherwise incur. AtDecember 31, 2020 , shared-loss protection remains for a single acquired bank related to single family residential loans of$34.5 million . Cumulative losses for all fourteen acquisitions incurred throughDecember 31, 2020 totaled$1.21 billion . Cumulative amounts reimbursed by theFDIC throughDecember 31, 2020 totaled$674.9 million . The shared-loss agreements for twoFDIC -assisted transactions include provisions related to payments owed to theFDIC at the termination of the agreements if actual cumulative losses on covered assets are lower than originally estimated by theFDIC at the time of acquisition ("clawback liability"). As ofDecember 31, 2020 , andDecember 31, 2019 , the estimated clawback liability was$15.6 million and$112.4 million , respectively. The reduction in the clawback liability was the result of a payment to theFDIC in the first quarter of 2020 for$99.5 million related to one of the transactions. We expect to make a clawback liability payment to theFDIC inMarch 2021 in the amount of$15.9 million . Table 5 provides changes in theFDIC clawback liability for the years endedDecember 31, 2020 and 2019. Table 5 FDIC CLAWBACK LIABILITY (Dollars in thousands) 2020 2019 Beginning balance$ 112,395 $ 105,618 Accretion 2,674 6,777
Payments to
-
Ending balance $ 15,601 $ 112,395
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Table 6
AVERAGE BALANCE SHEETS
2020 2019
Interest Interest
(Dollars in thousands, taxable Average Income/ Yield/ Average Income/ Yield/
equivalent) Balance Expense Rate Balance Expense Rate
Assets
Loans and leases(1) $ 31,605,090 $ 1,335,008 4.18 % $ 26,656,048 $ 1,219,825 4.54 %
Investment securities:
U.S. Treasury 432,938 3,103 0.72 945,094 22,235 2.35
Government agency 665,318 8,457 1.27 491,001 14,308 2.91
Mortgage-backed securities 7,414,661 108,604 1.46 5,198,884 114,819 2.21
Corporate bonds 397,322 20,349 5.12 153,841 7,945 5.16
Other investments 144,694 4,254 2.94 130,249 2,205 1.69
Total investment securities 9,054,933 144,767
1.60 6,919,069 161,512 2.33
Overnight investments 2,691,096 6,847 0.25 1,291,617 26,245 2.03
Total interest-earning assets 43,351,119 $ 1,486,622 3.40 % 34,866,734 $ 1,407,582 4.01 %
Cash and due from banks 344,938 271,466
Premises and equipment 1,259,325 1,218,611
Allowance for credit losses (211,413) (226,600)
Other real estate owned 53,137 45,895
Other assets 1,224,332 985,613
Total assets $ 46,021,438 $ 37,161,719
Liabilities
Interest-bearing deposits:
Checking with interest $ 8,922,902 $ 5,913 0.07 % $ 7,503,325 $ 6,018 0.08 %
Savings 2,936,593 1,217 0.04 2,604,217 1,700 0.07
Money market accounts 7,821,266 22,504 0.29 6,025,740 23,315 0.39
Time deposits 3,344,492 37,001 1.11 3,315,478 45,221 1.36
Total interest-bearing deposits 23,025,253 66,635 0.29 19,448,760 76,254 0.39
Securities sold under customer repurchase agreements 632,362 1,610 0.25 530,818 1,995 0.38 Other short-term borrowings 50,549 1,054 2.05 23,087 671 2.87 Long-term obligations 1,186,145 26,558 2.20 392,150 13,722 3.45 Total interest-bearing liabilities 24,894,309 95,857 0.38 20,394,815 92,642 0.45 Demand deposits 16,721,363 12,769,776 Other liabilities 451,759 445,347 Shareholders' equity 3,954,007 3,551,781 Total liabilities and shareholders' equity$ 46,021,438 $ 37,161,719 Interest rate spread 3.02 % 3.56 % Net interest income and net yield on interest-earning assets$ 1,390,765 3.17 %$ 1,314,940 3.74 % (1)Loans and leases include non-PCD and PCD loans, nonaccrual loans and loans held for sale. Interest income on loans and leases includes accretion income and loan fees. Loan fees were$85.7 million ,$9.7 million , and$8.8 million for the years ended 2020, 2019, and 2018, respectively. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax rates of 21.0% for 2020, 2019, and 2018, as well as state income tax rates of 3.5%, 3.9%, and 3.4% for the years ended 2020, 2019, and 2018, respectively. The taxable-equivalent adjustment was$2.6 million ,$3.6 million , and$3.4 million , for the years ended 2020, 2019, and 2018, respectively. (2)The rate/volume variance is allocated proportionally between the changes in volume and rate. 34 -------------------------------------------------------------------------------- Table 6 AVERAGE BALANCE SHEETS (continued) 2020
2019
2018 Change from previous year due to: Change from previous year due to:
Interest
Average Income/ Yield/ Total Total
Balance Expense Rate Volume Yield/Rate Change(2) Volume Yield/Rate Change(2)
$ 24,483,719 $ 1,075,682 4.36 % $ 232,398 $ (117,215) $ 115,183 $ 83,908 $
60,235
1,514,598 28,277 1.87 (12,058) (7,074) (19,132) (10,632) 4,590 (6,042)
106,067 2,697 2.54 5,080 (10,931) (5,851) 9,787 1,824 11,611
5,241,865 113,698 2.17 51,357 (57,572) (6,215) (191) 1,312 1,121
104,796 5,727 5.46 12,575 (171) 12,404 2,680 (462) 2,218
107,603 1,059 0.98 208 1,841 2,049 230 916 1,146
7,074,929 151,458 2.14 57,162 (73,907) (16,745) 1,874 8,180 10,054
1,289,013 21,997 1.71 28,418 (47,816) (19,398) 45 4,203 4,248
32,847,661 $ 1,249,137 3.78 % $ 317,978 $ (238,938) $ 79,040 $ 85,827 $ 72,618 $ 158,445
281,510
1,164,542
(223,300)
47,053
762,446
$ 34,879,912
$ 7,278,662 $ 3,725 0.05 % $ 1,122 $ (1,227) $ (105) $ 112 $ 2,181 $ 2,293
2,466,734 789 0.03 214 (697) (483) 44 867 911
5,903,823 8,196 0.14 6,886 (7,697) (811) 170 14,949 15,119
2,427,949 9,773 0.40 295 (8,515) (8,220) 3,572 31,876 35,448
18,077,168 22,483 0.12 8,517 (18,136) (9,619) 3,898 49,873 53,771
555,555 1,738 0.31 377 (762) (385) (77) 334 257
58,686 1,919 3.27 788 (405) 383 (1,164) (84) (1,248)
304,318 10,717 3.48 28,558 (15,722) 12,836 3,057 (52) 3,005
18,995,727 36,857 0.19 38,240 (35,025) 3,215 5,714 50,071 55,785
12,088,081
373,163
3,422,941
$ 34,879,912
3.59 %
$ 1,212,280 3.66 % $ 279,738 $ (203,913) $ 75,825 $ 80,113 $ 22,547 $ 102,660
35-------------------------------------------------------------------------------- RESULTS OF OPERATIONS Net Interest Margin and Income (Taxable Equivalent Basis) Taxable-equivalent net interest income was$1.39 billion for the year endedDecember 31, 2020 , an increase of$75.8 million , or 5.8%, compared to 2019. Interest income increased$79.0 million and interest expense increased by$3.2 million . Interest income earned on loans and leases was$1.34 billion during 2020, an increase of$115.2 million compared to 2019. The increase was primarily due to the impacts of SBA-PPP loans, which contributed$90.1 million , and organic loan growth, partially offset by lower yields. Interest income earned on investment securities was$144.8 million and$161.5 million during 2020 and 2019, respectively. The$16.7 million decrease was primarily due to a 73 basis point decline in the investment yield, partially offset by higher average balances. Interest expense on interest-bearing deposits was$66.6 million in 2020, a decrease of$9.6 million compared to 2019, primarily due to lower rates paid on money market and time deposits. Interest expense on borrowings was$29.2 million in 2020, an increase of$12.8 million compared to 2019, primarily due to an increase in average borrowings, partially offset by lower rates paid. The year-to-date taxable equivalent net interest margin for 2020 was 3.17%, compared to 3.74% during 2019. The margin compression was primarily due to a decline in the yield on interest-earning assets coupled with an increase in total borrowings, partially offset by a decline in the rate paid on interest-bearing deposits. During 2020, yields on loans, investment securities and overnight investments decreased 36 basis points to 4.18%, 73 basis points to 1.60% and 178 basis points to 0.25%, respectively. Average interest-earning assets increased$8.48 billion , or by 24.3% for the year endedDecember 31, 2020 . Growth in average interest-earning assets during 2020 was primarily due to higher investment balances, the impact of SBA-PPP loans and other organic loan growth. The year-to-date taxable-equivalent yield on interest-earning assets in 2020 declined by 61 basis points to 3.40%. Average interest-bearing liabilities increased$4.50 billion for the year endedDecember 31, 2020 , primarily due to increased interest-bearing deposits and borrowings. The rate paid on interest-bearing liabilities decreased 7 basis points in 2020 from 0.45% to 0.38%. Provision for Credit Losses BancShares recorded a provision for credit losses for loans and leases of$58.4 million for the year endedDecember 31, 2020 , compared to$31.4 million for same period in 2019. This increase was primarily due to a COVID-19-related reserve build of$36.1 million during the first half of 2020 as loss estimates consider the potential uncertainty of slower economic activity and elevated unemployment, as well as potential mitigants due to government stimulus and loan accommodations. Noninterest Income Table 7 NONINTEREST INCOME Year ended December 31 (Dollars in thousands) 2020 2019 2018 Wealth management services$ 102,776 $ 99,241 $ 97,966 Service charges on deposit accounts 87,662 105,191 105,486 Cardholder services, net 74,291 69,078 65,478 Mortgage income 39,592 21,126 16,433 Other service charges and fees 30,911 31,644 30,606 Merchant services, net 24,122 24,304 24,504 Insurance commissions 14,544 12,810 12,702 ATM income 5,758 6,296 7,980
Realized gains on investment securities available for sale, net
60,253 7,115 351
Marketable equity securities gains (losses), net 29,395 20,625 (7,610)
Gain on extinguishment of debt - - 26,553
Other 7,446 18,431 19,700
Total noninterest income $ 476,750
36
--------------------------------------------------------------------------------
For the year ended December 31, 2020 , total noninterest income was $476.8
million , compared to $415.9 million for 2019, an increase of $60.9 million , or
14.6%. The change was primarily attributable to the following:
•Gains on sale of investment securities available for sale increased by $53.1
million .
•Mortgage income increased $18.5 million primarily due to origination volume
brought about by lower mortgage rates. The production-related income was
partially offset by a $4.1 million impairment of mortgage servicing rights
recorded due to accelerated prepayments.
•The $29.4 million net gain included realized gains on the sale equity
securities of $44.6 million .
•Service charges on deposit accounts decreased $17.5 million primarily due to
lower volume with increased deposit balances and an increase in waived fees to
aid our customers during the COVID-19 pandemic.
•Other noninterest income decreased $11.0 million primarily due to acquired
recoveries on PCD loans, formerly reported in noninterest income. After adoption
of CECL, these are recorded as a component of the allowance for credit losses.
Noninterest Expense
Table 8
NONINTEREST EXPENSE
Year ended December 31
(Dollars in thousands) 2020 2019 2018
Salaries and wages $ 590,020 $ 551,112 $ 527,691
Employee benefits 132,244 120,501 118,203
Occupancy expense 117,169 111,179 109,169
Equipment expense 115,535 112,290 102,909
Processing fees paid to third parties 44,791 29,552 30,017
Merger-related expenses 17,450 17,166 6,462
Core deposit intangible amortization 14,255 16,346 17,165
Collection and foreclosure-related expenses 13,658 11,994 16,567
Consultant expense 12,751 12,801 14,345
FDIC insurance expense 12,701 10,664 18,890
Telecommunications expense 12,179 9,391 10,471
Advertising expense 10,010 11,437 11,650
Other 95,922 89,308 93,432
Total noninterest expense $ 1,188,685 $ 1,103,741 $ 1,076,971 For the year ended
•Personnel expense, which includes salaries, wages and employee benefits, increased by$50.7 million , primarily due to an increase in salaries and wages as a result of merit increases and additional headcount from recent acquisitions. •Processing fees paid to third parties increased$15.2 million primarily due to the continued investment in our digital banking offerings as well as processing fees related to recent acquisitions. •Other noninterest expense increased$6.6 million primarily due to increased pension costs due to a lower discount rate and a higher provision related to unfunded loan commitments as a result of the potential economic impact of COVID-19. The increase was partially offset by a decrease in travel expense. •Occupancy expense increased$6.0 million primarily due to cleaning and sanitizing efforts in branches and corporate buildings to combat the spread of COVID-19. Income Taxes For 2020, income tax expense was$126.2 million compared to$134.7 million during 2019 and$103.3 million during 2018. Effective tax rates were 20.4%, 22.7% and 20.5% during the respective periods. 37 -------------------------------------------------------------------------------- The effective tax rate for the year ended 2020 was favorably impacted by$13.9 million due to the decision to utilize an allowable alternative for computing our 2020 federal income tax liability. Without this alternative, the effective tax rate would have been approximately 22.7% for the year ended 2020. The allowable alternative provides us the ability to use the federal income tax rate for certain current year deductible amounts related to prior yearFDIC -assisted acquisitions that was applicable when these amounts were originally subjected to tax. INTEREST-EARNING ASSETS Interest-earning assets include overnight investments, investment securities and loans and leases, all of which reflect varying interest rates based on the risk level and repricing characteristics of the underlying asset. Higher risk investments typically carry a higher interest rate, but expose us to higher levels of market and/or credit risk. We strive to maintain a high level of interest-earning assets relative to total assets, while keeping non-earning assets at a minimum. Interest-earning assets totaled$47.19 billion and$37.23 billion atDecember 31, 2020 andDecember 31, 2019 , respectively. The$9.96 billion increase was primarily composed of a$3.91 billion increase in loans and leases, a$3.24 billion increase in overnight investments and a$2.75 billion increase in investment securities.Investment Securities The primary objective of the investment portfolio is to generate incremental income by deploying excess funds into securities that have minimal liquidity risk and low to moderate interest rate risk and credit risk. Other objectives include acting as a stable source of liquidity, serving as a tool for asset and liability management and maintaining an interest rate risk profile compatible with BancShares' objectives. Additionally, purchases of equities and corporate bonds in other financial institutions have been made largely under a long-term earnings optimization strategy. Changes in the total balance of our investment securities portfolio result from trends in balance sheet funding and market performance. Generally, when inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds into the securities portfolio or into overnight investments. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow any overnight investments to decline and use proceeds from maturing securities and prepayments to fund loan demand. See Note A, Accounting Policies and Basis of Presentation, and Note C, Investments, in the Notes to Consolidated Financial Statements for additional disclosures regarding investment securities. The carrying value of all investment securities was$9.92 billion atDecember 31, 2020 , an increase of$2.75 billion compared to$7.17 billion atDecember 31, 2019 . The increase in the portfolio was primarily attributable to purchases totaling$10.64 billion , partially offset by maturities and paydowns of$3.09 billion and sales of$4.94 billion . This increase was due to excess liquidity generated by significant deposit growth during the year. As ofDecember 31, 2020 , investment securities available for sale had a net pre-tax unrealized gain of$102.3 million , compared to a net pre-tax unrealized gain of$7.5 million as ofDecember 31, 2019 . After evaluating the investment securities with unrealized losses, management concluded that no credit-related impairment existed as ofDecember 31, 2020 . Investment securities classified as available for sale are reported at fair value and unrealized gains and losses are included as a component of accumulated other comprehensive income ("AOCI"), net of deferred taxes. OnNovember 1, 2020 , mortgage-backed securities with an amortized cost of$1.46 billion were transferred from investment securities available for sale to the held to maturity portfolio. At the time of transfer, the mortgage-backed securities had a fair value of$1.47 billion and a weighted average contractual maturity of 18 years. The unrealized gain on these securities at the date of transfer was$5.9 million , or$4.5 million net of tax, and was reported as a component of AOCI. This unrealized gain is accreted over the remaining expected life of the securities as an adjustment of yield. OnNovember 1, 2019 , as part of the adoption of ASU 2019-04, mortgage-backed securities with an amortized cost of$2.08 billion were transferred from investment securities held to maturity to the available for sale portfolio. At the time of the transfer, the mortgage-backed securities had a fair value of$2.15 billion . The transfer resulted in a reclassification of unrealized losses of$72.5 million , or$55.8 million net of tax, previously frozen in AOCI. The transfer does not impact our intent and ability to hold the remainder of the held to maturity portfolio to maturity. 38 -------------------------------------------------------------------------------- Table 9 presents the investment securities portfolio atDecember 31, 2020 segregated by major category. Table 9 INVESTMENT SECURITIES December 31, 2020 December 31, 2019 Fair Fair (Dollars in thousands) Composition(1) Cost Value Composition(1) Cost Value Investment securities available for sale U.S. Treasury 5.0 %$ 499,832 $ 499,933 5.7 %$ 409,397 $ 409,999 Government agency 7.0 706,241 701,391 9.5 684,085 682,772 Residential mortgage-backed securities 44.5 4,369,130 4,438,103 73.4 5,269,060 5,267,090 Commercial mortgage-backed securities 7.9 745,892 771,537 5.3 373,105 380,020 Corporate bonds 6.1 590,870 603,279 2.8 198,278 201,566 State, county and municipal - - - 1.7 118,227 118,227 Total investment securities available for sale 70.5 6,911,965 7,014,243 98.4 7,052,152 7,059,674 Investment in marketable equity securities 0.9 84,837 91,680 1.2 59,262 82,333 Investment securities held to maturity Residential mortgage-backed securities 19.1 1,877,692 1,895,381 - - - Commercial mortgage-backed securities 9.4 937,034 940,862 - - - Other 0.1 2,256 2,256 0.4 30,996 30,996 Total investment securities held to maturity 28.6 2,816,982 2,838,499 0.4 30,996 30,996 Total investment securities 100.0 %$ 9,813,784 $ 9,944,422 100.0 % $
7,142,410
Table 10 presents the weighted average taxable-equivalent yields for investment securities held to maturity atDecember 31, 2020 segregated by major category with ranges of contractual maturities. The weighted average yield on the portfolio is calculated using security-level annualized yields. Table 10 WEIGHTED AVERAGE YIELD ON INVESTMENT SECURITIES December 31, 2020 Within One to Five Five to 10 One Year Years Years After 10 Years Total Investment securities held to maturity Residential mortgage-backed securities(1) - % - % - % 1.13 % 1.13 % Commercial mortgage-backed securities(1) - - - 1.27 1.27 Other investments 1.17 1.37 - - 1.31 Total investment securities held to maturity 1.17 % 1.37 % - % 1.18 % 1.18 % (1)Residential mortgage-backed and commercial mortgage-backed securities, which are not due at a single maturity date, have been included in maturity groupings based on the contractual maturity. The expected life will differ from contractual maturities because borrowers have the right to prepay the underlying loans. Loans and Leases Loans held for sale were$124.8 million atDecember 31, 2020 , a net increase of$57.0 million sinceDecember 31, 2019 . The increase is primarily due to originations of$1.08 billion driven by low interest rates, partially offset by sales of$1.05 billion . Loans and leases held for investment are classified differently, dependent on whether they are originated or purchased, and if purchased, whether or not the loans reflect more than insignificant credit deterioration since origination as of the date of acquisition. Non-PCD loans consist of loans which were originated by us or purchased from other institutions that did not reflect more than insignificant credit deterioration at acquisition. PCD loans are purchased loans which reflect a more than insignificant credit deterioration since origination as of the date of acquisition. Loans and leases held for investment were$32.79 billion atDecember 31, 2020 , a net increase of$3.91 billion , representing growth of 13.5% sinceDecember 31, 2019 . This increase was driven by a$4.01 billion net increase in the non-PCD portfolio offset by a$95.8 million net decrease in the PCD loan portfolio. The net increase in the non-PCD portfolio was due to$2.41 billion related to SBA-PPP loans as well as organic growth, primarily in our commercial segments. The net decrease in PCD loans was primarily due to pay downs and pay-offs, partially offset by a$19.0 million increase from the adoption of ASC 326. Excluding 2020 loans related to SBA-PPP and acquired loans, total loans grew by 4.9%. 39 -------------------------------------------------------------------------------- We report non-PCD and PCD loan portfolios separately, with the non-PCD portfolio further divided into commercial and consumer segments. Non-PCD loans and leases atDecember 31, 2020 were$32.33 billion compared to$28.32 billion atDecember 31, 2019 , representing 98.6% and 98.1% of total loans, respectively. PCD loans atDecember 31, 2020 were$462.9 million , compared to$558.7 million of PCI loans atDecember 31, 2019 , representing 1.4% and 1.9% of loans, respectively. The discount related to acquired non-PCD loans and leases atDecember 31, 2020 and non-PCI loans and leases atDecember 31, 2019 was$19.5 million and$30.9 million , respectively. The discount related to PCD loans atDecember 31, 2020 and PCI loans atDecember 31, 2019 was$45.3 million and$88.2 million , respectively. The primary driver of the decrease in PCD discount was loan payoffs as well as the adoption of ASC 326, which resulted in a$19.0 million reclassification of the credit portion of the loan discount to the ACL. During the year endedDecember 31, 2020 and 2019, accretion income on purchased non-PCD loans and leases was$11.3 million and$13.2 million , respectively. During the year endedDecember 31, 2020 and 2019, interest and accretion income on purchased PCD loans and leases was$59.7 million and$58.0 million , respectively.
Table 11 provides the composition of net loans and leases for the past three years.
40
--------------------------------------------------------------------------------
Table 11
LOANS AND LEASES
December 31
(Dollars in thousands) 2020
Non-PCD loans and leases:
Commercial:
Construction and land development $ 985,424
Owner occupied commercial mortgage 11,165,012
Non-owner occupied commercial mortgage 2,987,689
Commercial and industrial and leases 5,013,644
SBA-PPP 2,406,291 Total commercial loans 22,558,060 Consumer: Residential mortgage 5,561,686 Revolving mortgage 2,052,854 Construction and land development 348,123 Consumer auto 1,255,402 Consumer other 552,968 Total consumer loans 9,771,033 Total non-PCD loans and leases 32,329,093 PCD loans 462,882 Total loans and leases 32,791,975 Less allowance for credit losses (224,314) Net loans and leases$ 32,567,661 December 31 (Dollars in thousands) 2019 2018 Non-PCI loans and leases: Commercial: Construction and land development$ 1,013,454 $ 757,854 Commercial mortgage 12,282,635 10,717,234 Other commercial real estate 542,028 426,985 Commercial and industrial and leases 4,403,792 3,938,730 Other 310,093 296,424 Total commercial loans 18,552,002 16,137,227 Noncommercial: Residential mortgage 5,293,917 4,265,687 Revolving mortgage 2,339,072 2,542,975 Construction and land development 357,385 257,030 Consumer 1,780,404 1,713,781 Total noncommercial loans 9,770,778 8,779,473 Total non-PCI loans and leases$ 28,322,780 $ 24,916,700 PCI loans$ 558,716 $ 606,576 Total loans and leases 28,881,496 25,523,276 Less allowance for credit losses (225,141) (223,712) Net loans and leases$ 28,656,355 $ 25,299,564 41
-------------------------------------------------------------------------------- Allowance for Credit Losses DuringJanuary 2020 , we adopted ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASC 326"), which changed the methodology, accounting policies, and inputs used in determining the ACL. Refer to Note A, Accounting Policies and Basis of Presentation, in the Notes to Consolidated Financial Statements for a discussion of the methodology used in the determination of the ACL, as well as further information about the adoption, under the "Recently Issued Accounting Pronouncements" section. The ACL was$224.3 million atDecember 31, 2020 , compared to$225.1 million and$223.7 million atDecember 31, 2019 and 2018, respectively. The ACL as a percentage of total loans and leases was 0.68% atDecember 31, 2020 , compared to 0.78% and 0.88% atDecember 31, 2019 and 2018, respectively. The ACL as a percentage of total loans and leases excluding SBA-PPP loans, which have no associated ACL, was 0.74% atDecember 31, 2020 . Upon adoption of ASC 326 onJanuary 1, 2020 , BancShares recorded a net decrease of$37.9 million in the ACL which included a decrease of$56.9 million in the ACL on non-PCD loans, partially offset by an increase of$19.0 million in the ACL on PCD loans. The decrease in the ACL on non-PCD loans was primarily in the commercial segments as these portfolios have exhibited strong historical credit performance and have relatively short average lives. This decrease was partially offset by an increase in the consumer segments due to their longer average lives. The increase in the ACL on PCD loans was primarily the result of reallocating credit discount from loan balances into the ACL. At the time of adoption of ASC 326, the scope and severity of the COVID-19 pandemic and the related impacts were unknown. The economic forecasts did not project the impacts of the recession. The ACL is calculated using a variety of factors, including, but not limited to, charge-off and recovery activity, loan growth, changes in macroeconomic factors, collateral type, estimated loan life and changes in credit quality. For the period endedDecember 31, 2020 the primary reason for the ACL change since the adoption of ASC 326, was a$36.1 million reserve build due to the potential economic impact of COVID-19 and its estimated potential impact on credit losses. Forecasted economic conditions are developed using third party macroeconomic scenarios adjusted based on management's expectations over a reasonable and supportable forecast period of two years. Assumptions revert to the long term historic averages over a one year period. Significant macroeconomic factors used in estimating the expected losses include unemployment, gross domestic product, home price index and commercial real estate index. Our model results consider baseline, adverse and upside scenarios. To calculate the ACL, we utilized the baseline scenario, which considers government stimulus and incorporates significant improvements to the most significant forecast assumptions when compared on the COVID-19-impacted levels from early in 2020. As ofDecember 31, 2020 , the baseline forecast utilized the following significant inputs over the two-year reasonable and supportable forecast period: Unemployment - Rates are projected to remain elevated, and will generally decrease to just below 6% by the end of 2022. GDP Growth - Peak growth of 3.6% in the first quarter of 2021, primarily decreasing to under 3% in late 2022. Home Pricing Index - Growth rates below 1% in early 2021 which increase to close to 4% in late 2022. Commercial Real Estate Index - Forecasted downturn beginning 1Q21 with a maximum 20.7% drop by the end of 2021, and then slowly improving towards positive growth. The model result was calibrated using management's expectation of borrower performance based upon COVID-19 residual risk by industry. These loss estimates were also influenced by strong credit quality, low net charge-offs and recent credit trends, which remained relatively stable through the period endedDecember 31, 2020 . AtDecember 31, 2020 , the ACL on non-PCD loans and leases was$200.3 million , or 0.62% of non-PCD loans and leases, compared to$217.6 million , or 0.77%, atDecember 31, 2019 , and$214.6 million , or 0.86%, atDecember 31, 2018 . The ACL as a percentage of non-PCD loans and leases excluding SBA-PPP loans was 0.67% atDecember 31, 2020 . Aside from SBA-PPP loans, which have no allowance, the decrease sinceDecember 31, 2019 was primarily due to the adoption of ASC 326, partially offset by the forecasted potential economic impact of the COVID-19 pandemic on expected credit losses. The adoption of ASC 326 resulted in a decrease of 18 basis points, while the COVID-19 reserve build resulted in an increase of 11 basis points. In the period after adoption of ASC 326, the ACL on commercial portfolios increased$26.0 million , with the largest share of the increase within the non-owner occupied commercial real estate as this portfolio contained industries hardest hit by the pandemic such as hospitality, lessors and retail. The ACL on consumer portfolios increased$13.6 million , with the largest increase within residential mortgages, due to loan growth during the year. AtDecember 31, 2020 , the ACL on PCD loans totaled$24.0 million compared to$7.5 million atDecember 31, 2019 and$9.1 million , atDecember 31, 2018 . The increase was primarily due the adoption of ASC 326, partially offset by loan payoffs. 42 -------------------------------------------------------------------------------- AtDecember 31, 2020 , the ACL on unfunded commitments was$12.8 million compared to$1.1 million atDecember 31, 2019 and$1.1 million , atDecember 31, 2018 . The increase was primarily due the adoption of ASC 326. Table 12 provides details of the ACL, provision components and net charge-off ratio by loan class for the past three years. Table 12 ALLOWANCE FOR CREDIT LOSSES Year ended December 31, 2020 Construction and land Commercial development Owner occupied Non-owner occupied and industrial and Residential Revolving Construction and land (Dollars in thousands) - commercial commercial mortgage commercial mortgage leases mortgage mortgage development - consumer Consumer auto Consumer other PCD Total Allowance for credit losses: Balance atDecember 31, 2019 $ 33,213 $ 36,444 $ 11,102 $ 61,610 $ 18,232 $ 19,702 $ 2,709$ 4,292 $ 30,301 $ 7,536 $ 225,141 Adoption of ASC 326 (31,061) (19,316) 460 (37,637) 17,118 3,665 (1,291) 1,100 10,037 19,001 (37,924) Balance atJanuary 1, 2020 2,152 17,128 11,562 23,973 35,350 23,367 1,418 5,392 40,338 26,537 187,217 Provision (credits) 4,301 6,729 12,917 13,816 9,684 1,134 266 6,297 10,410 (7,202) 58,352 Initial allowance on PCD loans - - - - - - - - - 1,193 1,193 Charge-offs (138) (593) (1,951) (14,904) (1,653) (1,662) (70) (3,646) (17,188) (3,300) (45,105) Recoveries 431 401 124 4,894 717 1,918 117 1,417 5,879 6,759 22,657
Balance at
$ 22,652 $ 27,779 $ 44,098 $ 24,757 $ 1,731$ 9,460
Net charge-off ratio (0.03) % - % 0.06 % 0.21 % 0.02 % (0.01) % (0.01) % 0.18 % 2.06 % (0.67) % 0.07 % Net charge-offs$ (293) $ 192$ 1,827 $ 10,010 $ 936 $ (256) $ (47)$ 2,229
1,017,595 10,418,447 2,995,382 4,881,884 5,382,045 2,122,144 355,368 1,207,820 550,223 517,121 31,417,256
Years ended December 31, 2019 and 2018
Construction
Construction Commercial and land
and land Other and development
development Commercial commercial industrial and Residential Revolving - non-
(Dollars in thousands) - commercial mortgage real estate leases Other mortgage mortgage commercial Consumer PCI Total
Allowance for credit losses:
Balance at January 1, 2019 $ 35,270 $ 43,451 $ 21,862 $ 2,350 $ 35,841 $ 9,144 $ 223,712 Provision (credits) (2,171) 2,384 (285) 14,212 (754) 3,481 (788) 359 16,611 (1,608) 31,441 Charge-offs (196) (1,096) - (13,352) (100) (1,137) (2,584) - (24,562) - (43,027) Recoveries 310 596 15 2,894 869 416 1,212 - 6,703 - 13,015
Balance at
$ 19,702 $ 2,709 $ 34,593 $ 7,536 $ 225,141 Net charge-off ratio (0.01) % - % - % 0.26 % (0.26) % 0.02 % 0.06 % - % 1.03 % - % 0.11 % Net charge-offs$ (114) $ 500 $ (15) $ 10,458 $ (769) $ 721 $ 1,372 $ -$ 17,859 $ -$ 30,012 Average loans 817,633 11,240,281
495,737 4,024,300 297,849 4,709,971 2,430,788 302,118 1,739,693 537,131 26,595,501
Balance at January 1, 2018 24,470 45,005 4,571 59,824 4,689 15,706 22,436 3,962 31,204 10,026 221,893
Provision (credits) 10,533 (1,490) (2,171) 2,511 (2,827) 897 1,112 (1,520) 22,187 (765) 28,467
Charge-offs (44) (1,140) (69) (10,211) (130) (1,689) (3,235) (219) (22,817) (117) (39,671)
Recoveries 311 1,076 150 3,496 489 558 1,549 127 5,267 - 13,023
Balance at
(0.04) % - % (0.02) % 0.18 % (0.12) % 0.03 % 0.06 % 0.04 % 1.10 % 0.02 % 0.11 %
Net charge-offs $ (267) $ 64
717,668 10,255,531 443,956 3,732,452 298,364 3,903,796
2,610,110 249,488 1,601,226 671,128 24,483,719
43-------------------------------------------------------------------------------- Table 13 provides trends of the ACL ratios for the past three years. Table 13 ALLOWANCE FOR CREDIT LOSSES RATIOS (Dollars in thousands) 2020 2019 2018 Allowance for credit losses to total loans and leases: 0.68 % 0.78 % 0.88 % Allowance for credit losses$ 224,314 $ 225,141 $ 223,712 Total loans and leases 32,791,975 28,881,496 25,523,276 Allowance for credit losses to non-PCD loans and leases: 0.62 % 0.77 % 0.86 %
Allowance for credit losses on non-PCD loans and leases
$ 217,605 $ 214,568 Total non-PCD loans and leases 32,329,093 28,322,780 24,916,700 Allowance for credit losses to PCD loans: 5.18 % 1.35 % 1.51 % Allowance for credit losses on PCD loans$ 23,987 $ 7,536 $ 9,144 Total PCD loans 462,882 558,716 606,576 44
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Table 14 details the allocation of the ACL among the various loan types. See
Note E, Allowance for Credit Losses, in the Notes to Consolidated Financial
Statements for additional disclosures regarding the ACL.
Table 14
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
December 31
2020
Allowance for Percent of loans
(dollars in thousands) credit losses to total loans
Non-PCI loans and leases
Commercial:
Construction and land development $ 6,746 3.0 %
Owner occupied commercial mortgage 23,665 34.0
Non-owner occupied commercial mortgage 22,652 9.1
Commercial and industrial and leases 27,779 15.3
SBA-PPP - 7.3
Total commercial loans and leases 80,842 68.7
Consumer:
Residential mortgage 44,098 17.0
Revolving mortgage 24,757 6.3
Construction and land development 1,731 1.1
Consumer auto 9,460 3.8
Consumer other 39,439 1.7
Total consumer loans 119,485 29.9
Total non-PCD loans and leases 200,327 98.6
PCD loans 23,987 1.4
Total loans and leases $ 224,314 100.0 %
December 31
2019 2018
Allowance for Allowance for
loan and lease Percent of loans loan and lease Percent of loans
(dollars in thousands) losses to total loans losses to total loans
Non-PCI loans and leases
Commercial:
Construction and land development $ 33,213 3.5 % $ 35,270 3.0 %
Commercial mortgage 45,335 42.5 43,451 42.0
Other commercial real estate 2,211 1.9 2,481 1.7
Commercial and industrial and leases 59,374 15.3 55,620 15.3
Other 2,236 1.1 2,221 1.2
Total commercial loans and leases 142,369 64.3 139,043 63.2
Noncommercial:
Residential mortgage 18,232 18.3 15,472 16.7
Revolving mortgage 19,702 8.1 21,862 10.0
Construction and land development 2,709 1.2 2,350 1.0
Consumer 34,593 6.2 35,841 6.7
Total noncommercial loans 75,236 33.8 75,525 34.4
Total non-PCI loans and leases 217,605 98.1 214,568 97.6
PCI loans 7,536 1.9 9,144 2.4
Total loans and leases $ 225,141 100.0 % $ 223,712 100.0 %
45
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Nonperforming Assets
Nonperforming assets include nonaccrual loans and other real estate owned
("OREO") resulting from both non-PCD and PCD loans. Non-PCD loans are generally
placed on nonaccrual when principal or interest becomes 90 days past due or when
it is probable that principal or interest is not fully collectable. When non-PCD
loans are placed on nonaccrual, all previously uncollected accrued interest is
reversed from interest income and the ongoing accrual of interest is
discontinued. Non-PCD loans and leases are generally removed from nonaccrual
status when they become current for a sustained period of time as to both
principal and interest and there is no longer concern as to the collectability
of principal and interest. Accretion of income for PCD loans is discontinued
when we are unable to estimate the amount or timing of cash flows. PCD loans may
begin or resume accretion of income when information becomes available that
allows us to estimate the amount and timing of future cash flows.
OREO includes foreclosed property and branch facilities that we have closed but
not sold. Net book values of OREO are reviewed at least annually to evaluate if
write-downs are required. The level of review is dependent on the value and type
of the collateral, with higher value and more complex properties receiving a
more detailed review. Changes to the value of the assets between scheduled
valuation dates are monitored through continued communication with brokers and
monthly reviews by the asset manager assigned to each asset. The asset manager
uses the information gathered from brokers and other market sources to identify
any significant changes in the market or the subject property as they occur.
Valuations are then adjusted or new appraisals are ordered to ensure the
reported values reflect the most current information.
Since OREO is carried at the lower of cost or market value, less estimated
selling costs, book value adjustments are only recorded when fair values have
declined. Decisions regarding write-downs are based on factors including
appraisals, previous offers received on the property, market conditions and the
number of days the property has been on the market.
Table 15 provides details on nonperforming assets and other risk elements.
Table 15
NONPERFORMING ASSETS
December 31
(Dollars in thousands, except ratios) 2020 2019 2018
Nonaccrual loans and leases:
Non-PCD $ 136,544 $ 114,946 $ 84,546
PCD 54,939 6,743 1,276
Total nonaccrual loans 191,483 121,689 85,822
Other real estate owned 50,890 46,591 48,030
Total nonperforming assets $ 242,373 Accruing loans and leases 90 days or more past due: Non-PCD$ 5,507 $ 3,291 $ 2,888 PCD 355 24,257 37,020
Ratio of total nonperforming assets to total loans, leases and other real estate owned
0.74 0.58 0.52
Ratio of nonaccrual loans and leases to total loans and leases
0.58 0.42 0.34
Ratio of allowance for credit losses to nonaccrual loans and leases
117.1 185.0 260.7
The increase in nonaccrual loans and leases was impacted by the dissolution of
PCI loan pools under the adoption of ASC 326 as those nonaccrual loans within
performing PCI pools were previously excluded from reporting. As of December 31,
2020 , there were $24.9 million of nonaccrual loans that had been released from
performing PCI pools. The remaining increase in nonaccrual loans was primarily
due to increases within our acquired residential real estate loan portfolio. The
credit quality of the portfolio remains in line with our risk tolerances and
management is actively monitoring any potential increases in portfolio risk due
to COVID-19.
46
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Troubled Debt Restructurings
A loan is considered a troubled debt restructuring ("TDR") when both of the
following occur: (1) a modification to a borrower's debt agreement is made and
(2) a concession is granted for economic or legal reasons related to a
borrower's financial difficulties that otherwise would not be granted. TDR
concessions could include deferrals of interest, modifications of payment terms,
or, in certain limited instances, forgiveness of principal or interest. Acquired
loans are classified as TDRs if a modification is made subsequent to
acquisition. We further classify TDRs as performing and nonperforming.
Performing TDRs accrue interest at the time of restructure and continue to
perform based on the restructured terms. Nonperforming TDRs do not accrue
interest and are included with other nonperforming assets within nonaccrual
loans and leases in Table 14 above.
The Interagency Statement on Loan Modifications and Reporting for Financial
Institutions Working with Customers Affected by the Coronavirus was published by
banking regulators in April 2020 to clarify expectations around loan
modifications and the determination of TDRs for borrowers experiencing
COVID-19-related financial difficulty. BancShares applied this regulatory
guidance during its TDR identification process for short-term loan forbearance
agreements as a result of COVID-19 and in most cases is not recording these as
TDRs. See Note A, Accounting Policies and Basis of Presentation, in the Notes to
Consolidated Financial Statements for discussion of our accounting policies for
TDRs.
Table 16 provides further details on performing and nonperforming TDRs for the
last three years.
Table 16
TROUBLED DEBT RESTRUCTURINGS
December 31
(Dollars in thousands) 2020 2019 2018
Accruing TDRs:
Non-PCD $ 139,747 $ 111,676 $ 108,992
PCD 17,617 17,074 18,101
Total accruing TDRs $ 157,364 $ 128,750 $ 127,093
Nonaccruing TDRs:
Non-PCD 43,470 42,331 28,918
PCD 7,346 111 119
Total nonaccruing TDRs $ 50,816 $ 42,442 $ 29,037
All TDRs:
Non-PCD 183,217 154,007 137,910
PCD 24,963 17,185 18,220
Total TDRs $ 208,180 $ 171,192 $ 156,130
INTEREST-BEARING LIABILITIES
Interest-bearing liabilities include interest-bearing deposits, securities sold
under customer repurchase agreements, FHLB borrowings, subordinated debt, and
other borrowings. Interest-bearing liabilities totaled $27.31 billion at
December 31, 2020 , compared to $22.83 billion at December 31, 2019 . The $4.48
billion increase was due to an increase in interest-bearing deposits of $3.91
billion and an increase in total borrowings of $562.8 million .
Deposits
At December 31, 2020 , total deposits were $43.43 billion , an increase of $9.00
billion , or 26.1%, since 2019. This growth includes estimated deposits of $0.93
billion related to the SBA-PPP and deposits from acquisitions of $203.2 million .
Excluding the impact of these deposits, total deposits increased $7.87 billion
since December 31, 2019 , or by 22.9%.
47
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Table 17 provides deposit balances as of December 31, 2020 and 2019.
Table 17
DEPOSITS
December 31
(Dollars in thousands) 2020 2019
Demand $ 18,014,029 $ 12,926,796
Checking with interest 10,591,687 8,284,302
Money market 8,632,713 6,817,752
Savings 3,304,167 2,564,777
Time 2,889,013 3,837,609
Total deposits $ 43,431,609 $ 34,431,236
Due to our focus on maintaining a strong liquidity position, core deposit
retention remains a key business objective. We believe that traditional bank
deposit products remain an attractive option for many customers, but as economic
conditions improve, we recognize that our liquidity position could be adversely
affected as bank deposits are withdrawn and invested elsewhere. Our ability to
fund future loan growth is significantly dependent on our success retaining
existing deposits and generating new deposits at a reasonable cost.
Table 18 provides the expected maturity of time deposits in excess of $250
thousand , the FDIC insurance limit, as of December 31, 2020 .
Table 18
MATURITIES OF TIME DEPOSITS IN EXCESS OF $250,000
December 31
(Dollars in thousands) 2020 2019
Time deposits maturing in:
Three months or less $ 136,200 $ 245,743
Over three months through six months 118,496 164,335
Over six months through 12 months 86,260 200,199
More than 12 months 311,956 209,941
Total $ 652,912 $ 820,218
We estimate total uninsured deposits were $18.02 billion and $12.31 billion at
December 31, 2020 and 2019, respectively.
Borrowings
At December 31, 2020 , total borrowings were $1.89 billion compared to $1.33
billion at December 31, 2019 . The $562.8 million increase was primarily due to
an increase in subordinated debt of $341.1 million and an increase of $198.5
million in securities sold under customer repurchase agreements.
Table 19
BORROWINGS
December 31
(Dollars in thousands) 2020 2019
Securities sold under customer repurchase agreements
Federal Home Loan Bank borrowings 655,175 572,185 Subordinated debt SCB Capital Trust I 9,779 9,739 FCB/SC Capital Trust II 17,664 17,532 FCB/NC Capital Trust III 88,145 88,145 Capital Trust debentures assumed in acquisitions 14,433
14,433
3.375 %Fixed-to-Floating Rate Subordinated Notes due 2030 346,541
-
Other subordinated debt 27,956 33,563
Total subordinated debt 504,518 163,412
Other borrowings 88,470 148,318
Total borrowings $ 1,889,650 $ 1,326,871
48-------------------------------------------------------------------------------- BancShares owns four special purpose entities - SCB Capital Trust I, FCB/SC Capital Trust II, FCB/NC Capital Trust III, and Macon Capital Trust I (the "Trusts"), which mature in 2034, 2034, 2036 and 2034, respectively. Subordinated debentures included junior subordinated debentures representing obligations to the Trusts, which may be redeemed at par in whole or in part at any time. BancShares has guaranteed all obligations of the Trusts. OnMarch 4, 2020 , we completed a public offering of$350 million aggregate principal amount of our 3.375% Fixed-to-Floating Rate Subordinated Notes due 2030 and redeemable starting with the interest payment dueMarch 15, 2025 , subject to obtaining the prior approval of theFederal Reserve to the extent such approval is then required under the rules of theFederal Reserve , or earlier upon the occurrence of certain events. Commitments and Contractual Obligations Table 20 identifies significant obligations and commitments as ofDecember 31, 2020 representing required and potential cash outflows. See Note T, Commitments and Contingencies, for additional information regarding total commitments. Loan commitments and standby letters of credit are presented at contractual amounts and do not necessarily reflect future cash outflows as many are expected to expire unused or partially used. Table 20 COMMITMENTS AND CONTRACTUAL OBLIGATIONS Type of obligation Payments due by period (Dollars in thousands) Less than 1 year 1-3 years 3-5 years Thereafter Total Contractual obligations: Time deposits$ 1,844,860 $ 791,788 $ 110,868 $ 141,497 $ 2,889,013 Short-term borrowings 641,487 - - - 641,487 Long-term obligations 10,000 224,209 13,644 1,000,310 1,248,163 Estimated payment to settle FDIC clawback liability 15,888 - - - 15,888
Total contractual obligations
$ 6,043,887 $ 2,065,797
114,042 15,572 45 160 129,819
Affordable housing partnerships 27,423 22,751 2,526 1,039 53,739
Total commitments $ 6,185,352 $ 2,104,120 $ 694,657 $ 3,297,846 $ 12,281,975
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
We are committed to effectively managing our capital to protect our depositors,
creditors and shareholders. We continually monitor the capital levels and ratios
for BancShares and FCB to ensure they exceed the minimum requirements imposed by
regulatory authorities and to ensure they are appropriate, given growth
projections, risk profile and potential changes in the regulatory environment.
Failure to meet certain capital requirements may result in actions by regulatory
agencies which could have a material impact on our consolidated financial
statements.
During 2020, BancShares repurchased a total of 813,090 shares of Class A common
stock, or 8.4% of outstanding Class A shares as of December 31, 2019 , for $333.8
million at an average cost per share of $410.48 . During 2019, BancShares
repurchased a total of 998,910 shares of Class A common stock, or 9.4% of
outstanding Class A shares of as of December 31, 2018 , for $450.8 million at an
average cost per share of $451.33 . All share repurchases were executed under
previously approved authorities.
Upon expiration of the most recent share repurchase authorization on July 31,
2020 , share repurchase activity has ended and will be reevaluated in subsequent
periods.
During 2020 and 2019, the share repurchases included 45,000 and 100,000 shares,
respectively, of Class A common stock purchased from Ella Anna Holding , as
trustee of her revocable trust. Mrs. Holding is the widow of BancShares' former
Executive Vice Chairman, Frank B. Holding , and the mother of Frank B. Holding ,
Jr. and Hope H. Bryant , our Chairman and Chief Executive Officer and Vice
Chairman, respectively.
49
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Table 21 provides information on capital adequacy for BancShares and FCB as of
December 31, 2020 and 2019.
Table 21
ANALYSIS OF CAPITAL ADEQUACY
December 31, 2020 December 31, 2019
Requirements to be
(Dollars in thousands) well-capitalized Amount Ratio Amount Ratio
BancShares
Risk-based capital ratios
Total risk-based capital 10.00 % $ 4,577,212 13.81 % $ 3,731,501 12.12 %
Tier 1 risk-based capital 8.00 3,856,086 11.63 3,344,305 10.86
Common equity Tier 1 6.50 3,516,149 10.61 3,344,305 10.86
Tier 1 leverage capital(1) 5.00 3,856,086 7.86 3,344,305 8.81
FCB
Risk-based capital ratios
Total risk-based capital 10.00 4,543,496 13.72 3,837,670 12.46
Tier 1 risk-based capital 8.00 4,276,870 12.92 3,554,974 11.54
Common equity Tier 1 6.50 4,276,870 12.92 3,554,974 11.54
Tier 1 leverage capital(2) 5.00 4,276,870 8.72 3,554,974 9.38
(1)The SBA-PPP program added $2.41 billion in outstanding loan balances and consequently decreased BancShares' Tier 1 leverage ratio by 59 bps; BancShares' Tier 1
leverage ratio would be estimated at 8.45% at December 31, 2020 without the impact of the SBA PPP program.
(2) The SBA-PPP program added $2.41 billion in outstanding loan balances and consequently decreased FCB's Tier 1 leverage ratio by 65 bps; FCB's Tier 1 leverage
ratio would be estimated at 9.37% at December 31, 2020 without the impact of the SBA PPP program.
BancShares and FCB are required to meet minimum capital requirements set forth
by regulatory authorities. Bank regulatory agencies have approved regulatory
capital guidelines ("Basel III") aimed at strengthening existing capital
requirements for banking organizations. Basel III became effective for
BancShares on January 1, 2015 . Under Basel III, requirements include total
risk-based capital ratio minimum of 8.00%, Tier 1 risk-based capital minimum of
6.00%, a common equity Tier 1 ratio minimum of 4.50%, and Tier 1 leverage
capital ratio minimum of 4.00%. Failure to meet minimum capital requirements may
result in certain actions by regulators which could have a direct material
effect on the consolidated financial statements.
BancShares and FCB both remain well-capitalized under Basel III capital
requirements. BancShares and FCB had capital conservation buffers of 5.63% and
5.72%, respectively, at December 31, 2020 . These buffers exceeded the 2.50%
minimum requirement below which the regulators may impose limits on
distributions.
At December 31, 2020 , BancShares and FCB had $128.5 million and $24.0 million ,
respectively, of trust preferred capital securities and $377.5 million and $27.5
million , respectively, of qualifying subordinated debentures included in Tier 2
capital. At December 31, 2019 , BancShares and FCB had $128.5 million and $24.0
million , respectively, of trust preferred capital securities and $32.5 million
of qualifying subordinated debentures included in Tier 2 capital. Under current
regulatory guidelines, when subordinated debentures are within five years of
scheduled maturity date, issuers must discount the amount included in Tier 2
capital by 20% for each year until the debt matures. Once the debt is within one
year of its scheduled maturity date, no amount of the debt is allowed to be
included in Tier 2 capital.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
RISK MANAGEMENT
Risk is inherent in any business. BancShares has defined a moderate risk
appetite, a conservative approach to risk taking, with a philosophy which does
not preclude higher risk business activities balanced with acceptable returns
while meeting regulatory objectives. Through the comprehensive Enterprise Risk
Management Framework and Risk Appetite Framework, senior management has primary
responsibility for day-to-day management of the risks we face with
accountability of and support from all associates. Senior management applies
various strategies to reduce the risks to which BancShares may be exposed, with
effective challenge and oversight by management committees. In addition, the
Board strives to ensure the business culture is integrated with the Enterprise
Risk Management program and policies, procedures and metrics for identifying,
assessing, monitoring and managing risk are part of the decision-making process.
The Board's role in risk oversight is an integral part of our overall Enterprise
Risk Management Framework and Risk Appetite Framework. The Board administers its
risk oversight function primarily through the Board Risk Committee.
50
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The Board Risk Committee structure is designed to allow for information flow,
effective challenge and timely escalation of risk-related issues. The Board Risk
Committee is directed to monitor and advise the Board of Directors regarding
risk exposures, including Credit, Market, Capital, Liquidity, Operational,
Compliance, Strategic and Reputational risks; review, approve, and monitor
adherence to the Risk Appetite Statement and supporting risk tolerance levels
via a series of established metrics; and evaluate, monitor and oversee the
adequacy and effectiveness of the Risk Management Framework and Risk Appetite
Framework. The Board Risk Committee also reviews: reports of examination by and
communications from regulatory agencies; the results of internal and third party
testing and qualitative and quantitative assessments related to risk management;
and any other matters within the scope of the Committee's oversight
responsibilities. The Board Risk Committee monitors management's response to
certain risk-related regulatory and audit issues. In addition, the Board Risk
Committee may coordinate with the Audit Committee and the Compensation,
Nominations and Governance Committee for the review of financial statements and
related risks, information security and other areas of joint responsibility.
In combination with other risk management and monitoring practices,
enterprise-wide stress testing activities are part of the Risk Management
Framework and conducted within a defined framework. Stress tests are performed
for various risks to ensure the financial institution can support continued
operations during stressed periods.
Enactment of the Economic Growth, Regulatory Relief and Consumer Protection Act
in May 2018 significantly altered several provisions of the Dodd-Frank Act,
including how stress tests are run. Bank holding companies with assets of less
than $100 billion , such as BancShares, are no longer subject to company-run
stress testing requirements in section 165(i)(2) of the Dodd-Frank Act,
including publishing a summary of results; however, BancShares will continue to
monitor and stress test its capital and liquidity consistent with the safety and
soundness expectations of the federal regulators.
Credit risk management
Credit risk is the risk of not collecting payments pursuant to the contractual
terms of loans, leases and certain investment securities. Loans and leases we
originate are underwritten in accordance with our credit policies and procedures
and are subject to periodic ongoing reviews. Acquired loans, regardless of
whether PCD or non-PCD, are recorded at fair value as of the acquisition date
and are subject to periodic reviews to identify any further credit
deterioration. Our independent credit review function conducts risk reviews and
analyses of both originated and acquired loans to ensure compliance with credit
policies and to monitor asset quality trends and borrower financial strength.
These reviews include portfolio analysis by geographic location, industry,
collateral type and product. We strive to identify potential problem loans as
early as possible, to record charge-offs or write-downs as appropriate and to
maintain an adequate ACL that accounts for losses inherent in the loan and lease
portfolio.
We are actively monitoring our loan portfolio for areas of increased risk as a
result of COVID-19. As of December 31, 2020 , COVID-19 related loan extensions
decreased to approximately $230.6 million in outstanding loan balances,
representing approximately $6.3 million in payment deferrals. Through
December 31, 2020 , over 97% of all COVID-19 related loan extensions have begun
repayment. Delinquency trends among loans entering repayment are in line with
the remainder of the portfolio. We have not seen significant declines in overall
credit quality, though the impact of the SBA-PPP and payment extensions could be
delaying signs of credit deterioration.
Additionally, we are participating in the SBA-PPP program, which provided much
needed funds to our existing small business customers, and we continue to assess
both the credit and operational risks this program presents. BancShares
originated approximately 23,000 SBA-PPP loans with an outstanding balance of
$2.41 billion at December 31, 2020 .
Our ACL estimate for the year ended December 31, 2020 , included extensive
reviews of the changes in credit risk associated with the uncertainties around
economic forecasts and the overall economic impact of COVID-19. Expected loss
estimates within each portfolio considered the potential impact of slower
economic activity with elevated unemployment, as well as potential mitigating
impact from the government stimulus and loan modification programs. These loss
estimates additionally considered BancShares industry risk, historically strong
credit quality and actual net losses incurred during prior periods of economic
stress, as well as recent credit trends, which have not seen significant
deterioration from COVID-19 as of December 31, 2020 .
We maintain a well-diversified loan and lease portfolio and seek to minimize the
risks associated with large concentrations within specific geographic areas,
collateral types or industries. Despite our focus on diversification, several
characteristics of our loan portfolio subject us to significant risk, such as
our concentrations of real estate secured loans, revolving mortgage loans and
medical- and dental-related loans.
51
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We have historically carried a significant concentration of real estate secured
loans but actively mitigate exposure through underwriting policies which
primarily rely on borrower cash flow rather than underlying collateral values.
When we do rely on underlying real property values, we favor financing secured
by owner-occupied real property and, as a result, a large percentage of our real
estate secured loans are owner occupied. At December 31, 2020 , loans secured by
real estate were $23.56 billion , or 71.8%, of total loans and leases compared to
$22.38 billion , or 77.5% at December 31, 2019 , and $19.57 billion , or 76.7%, at
December 31, 2018 .
Similar to our branch footprint, the collateral of loans secured by real estate
is concentrated within North Carolina and South Carolina . At December 31, 2020 ,
real estate located in North Carolina and South Carolina represented 37.0% and
15.8%, respectively, of all real estate used as collateral.
Table 22 provides the geographic distribution of real estate collateral by
state.
Table 22
GEOGRAPHIC DISTRIBUTION OF REAL ESTATE COLLATERAL
December 31, 2020
Percent of real estate secured loans with
Collateral location collateral located in the state
North Carolina 37.0
South Carolina 15.8
California 10.5
Florida 7.5
Georgia 6.7
Virginia 6.2
Washington 3.4
Texas 2.7
Tennessee 1.6
All other locations 8.6
Among real estate secured loans, our revolving mortgage loans ("Home Equity
Lines of Credit" or "HELOCs") present a heightened risk due to long commitment
periods during which the financial position of individual borrowers or
collateral values may deteriorate significantly. In addition, a large percentage
of our HELOCs are secured by junior liens. Substantial declines in collateral
values could cause junior lien positions to become effectively unsecured. HELOCs
secured by real estate were $2.09 billion , or 6.4%, of total loans at
December 31, 2020 , compared to $2.38 billion , or 8.2%, at December 31, 2019 , and
$2.59 billion , or 10.2%, at December 31, 2018 .
Except for loans acquired through mergers and acquisitions, we have not
purchased HELOCs in the secondary market, nor have we originated these loans to
customers outside of our market areas. All originated HELOCs were underwritten
by us based on our standard lending criteria. The HELOC portfolio consists of
variable rate lines of credit which allow customer draws during a specified
period of the line of credit, with a portion switching to an amortizing term
following the draw period. Approximately 80.9% of the revolving mortgage
portfolio relates to properties in North Carolina and South Carolina .
Approximately 37.3% of the loan balances outstanding are secured by senior
collateral positions while the remaining 62.7% are secured by junior liens.
We actively monitor the portion of our HELOCs in the interest-only period and
when they will mature. Approximately 87.5% of outstanding balances at
December 31, 2020 , require interest-only payments, while the remaining require
monthly payments equal to the greater of 1.5% of the outstanding balance, or
$100 . When HELOCs switch from interest-only to fully amortizing, including
principal and interest, some borrowers may not be able to afford the higher
monthly payments. We have not experienced a significant increase in defaults as
a result of these increased payments. In the normal course of business, the bank
will work with each borrower as they approach the revolving period maturity date
to discuss options for refinance or repayment.
Loans and leases to borrowers in medical, dental or related fields were $5.54
billion as of December 31, 2020 , which represents 16.9% of total loans and
leases, compared to $5.16 billion or 17.9% of total loans and leases at
December 31, 2019 , and $4.98 billion or 21.1% of total loans and leases at
December 31, 2018 . The credit risk of this industry concentration is mitigated
through our underwriting policies which emphasize reliance on adequate borrower
cash flow rather than underlying collateral value and our preference for
financing secured by owner-occupied real property. Except for this single
concentration, no other industry represented more than 10% of total loans and
leases outstanding at December 31, 2020 .
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Interest rate risk management
Interest rate risk ("IRR") results principally from: assets and liabilities
maturing or repricing at different points in time, assets and liabilities
repricing at the same point in time but in different amounts, and short-term and
long-term interest rates changing in different magnitudes.
We assess our short-term IRR by forecasting net interest income over 24 months
under various interest rate scenarios and comparing those results to forecasted
net interest income, assuming stable rates. IRR scenarios modeled include, but
are not limited to, immediate, parallel rate shocks, interest rate ramps,
changes in the shape of the yield curve and changes in the relationships of our
rates to market rates.
Table 23 provides the impact on net interest income over 24 months resulting
from various instantaneous interest rate shock scenarios as of December 31, 2020
and 2019.
Table 23
NET INCOME SENSITIVITY SIMULATION ANALYSIS
Estimated (decrease) increase in net interest income
Change in interest rate (basis points) December 31, 2020 December 31, 2019
-100 (6.24) % (8.00) %
+100 8.09 1.30
+200 14.57 0.01
Net interest income sensitivity metrics at December 31, 2020 , compared to
December 31, 2019 , were primarily affected by an influx of non-maturity deposits
during the year, following the onset of the COVID-19 pandemic, which helped
boost overnight investments and improve sensitivity to rising interest rate
shocks.
Long-term interest rate risk exposure is measured using the economic value of
equity ("EVE") sensitivity analysis to study the impact of long-term cash flows
on earnings and capital. EVE represents the difference between the sum of the
present value of all asset cash flows and the sum of the present value of the
liability cash flows. EVE sensitivity analysis involves discounting cash flows
under different interest rate scenarios. The base-case measurement and its
sensitivity to shifts in the yield curve allow management to measure longer-term
repricing and option risk in the balance sheet.
Table 24 presents the EVE profile as of December 31, 2020 and 2019.
Table 24
ECONOMIC VALUE OF EQUITY MODELING ANALYSIS
Estimated (decrease) increase in EVE
Change in interest rate (basis points) December 31, 2020 December 31, 2019
-100 (21.20) % (8.25) %
+100 12.18 (0.03)
+200 15.71 (4.80)
The economic value of equity metrics at December 31, 2020 , compared to
December 31, 2019 , saw improvement when measured against moderate rising rate
shocks due largely to the same factors that impacted net interest income
sensitivity.
We do not typically utilize interest rate swaps, floors, collars or other
derivative financial instruments to attempt to hedge our overall balance sheet
rate sensitivity and interest rate risk.
53
--------------------------------------------------------------------------------Table 25 provides loan maturity distribution information. Table 25 LOAN MATURITY DISTRIBUTION
At
Within One to Five Five to 15
(Dollars in thousands) One Year Years Years After 15 years Total
Commercial:
Construction and land development
3,311,479 6,857,005 423,917 11,165,012
Non-owner occupied commercial
mortgage 257,558 1,289,739 1,385,624 54,768 2,987,689
Commercial and industrial and leases 1,024,974 2,502,099 1,475,041 11,530 5,013,644
SBA-PPP - 2,406,291 - - 2,406,291
Total commercial loans and leases 2,105,525 9,841,106 10,025,438 585,991 22,558,060
Consumer:
Residential mortgage 145,012 454,419 1,334,611 3,627,644 5,561,686
Revolving mortgage 78,774 400,154 155,984 1,417,942 2,052,854
Construction and land development 33,709 84,692 15,450 214,272 348,123
Consumer auto 10,521 629,433 615,448 - 1,255,402
Consumer other 342,512 128,717 40,968 40,771 552,968
Total consumer loans 610,528 1,697,415 2,162,461 5,300,629 9,771,033
PCD loans 65,754 116,227 181,640 99,261 462,882
Total loans and leases $ 2,781,807 $ 11,654,748 $ 12,369,539 $ 5,985,881 $ 32,791,975
Table 26 provides information regarding the sensitivity of loans and leases to
changes in interest rates.
Table 26
LOAN INTEREST RATE SENSITIVITY
Loans maturing after one year with
Variable interest
(Dollars in thousands) Fixed interest rates rates
Commercial:
Construction and land development $ 473,204 $ 261,838
Owner occupied commercial mortgage 9,779,082 813,319
Non-owner occupied commercial mortgage 2,322,234 407,897
Commercial and industrial and leases 3,551,690 436,980
SBA-PPP 2,406,291 -
Total commercial loans and leases 18,532,501 1,920,034
Consumer:
Residential mortgage 2,322,787 3,093,887
Revolving mortgage 41,232 1,932,848
Construction and land development 104,648 209,766
Consumer auto 1,244,881 -
Consumer other 124,526 85,930
Total consumer loans 3,838,074 5,322,431
PCD loans 188,458 208,670
Total loans and leases $ 22,559,033 $ 7,451,135
Liquidity risk management
Liquidity risk is the risk an institution is unable to generate or obtain
sufficient cash or its equivalents on a cost-effective basis to meet commitments
as they fall due. The most common sources of liquidity risk arise from
mismatches in the timing and value of on-balance sheet and off-balance sheet
cash inflows and outflows. In general, on-balance sheet mismatches generate
liquidity risk when the effective maturity of assets exceeds the effective
maturity of liabilities. A commonly cited example of a balance sheet liquidity
mismatch is when long-term loans (assets) are funded with short-term borrowings
(liabilities). Other forms of liquidity risk include market constraints on the
ability to convert assets into cash at expected levels, an inability to access
funding sources at sufficient levels at a reasonable cost and changes in
economic conditions or exposure to credit, market, operational, legal and
reputation risks affecting an institution's liquidity risk profile.
54
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We utilize various limit-based measures to monitor, measure and control
liquidity risk across three different types of liquidity:
•Tactical - Measures the risk of a negative cash flow position whereby cash
outflows exceed cash inflows over a short-term horizon out to nine weeks;
•Structural - Measures the amount by which illiquid assets are supported by
long-term funding; and
•Contingent - Measures the risk of having insufficient liquidity sources to
support cash needs under potential future stressed market conditions or having
an inability to access wholesale funding sources in a timely and cost effective
manner.
We aim to maintain a diverse mix of liquidity sources to support the liquidity
management function, while aiming to avoid funding concentrations by
diversifying our external funding with respect to maturities, counterparties and
nature. Our primary source of liquidity is our branch-generated deposit
portfolio due to the generally stable balances and low cost. Additional sources
include cash in excess of our reserve requirement at the Federal Reserve Bank
and various other correspondent bank accounts and unencumbered securities, which
totaled $9.63 billion at December 31, 2020 , compared to $3.57 billion at
December 31, 2019 . Another source of available funds is advances from the FHLB
of Atlanta and Chicago . Outstanding FHLB advances were $655.2 million as of
December 31, 2020 , and we had sufficient collateral pledged to secure $7.99
billion of additional borrowings. Further, in the current year, $4.10 billion in
non-PCD loans with a lendable collateral value of $3.32 billion were used to
create additional borrowing capacity at the Federal Reserve Bank . We also
maintain Federal Funds and other credit lines, which had $598.0 million of
available capacity at December 31, 2020 .
FOURTH QUARTER ANALYSIS
For the quarter ended December 31, 2020 , net income was $138.1 million compared
to $101.9 million for the corresponding quarter of 2019, an increase of $36.2
million or 35.5%. The increase was primarily the result of higher net interest
income, higher noninterest income and lower provision expense, partially offset
by higher noninterest expense. Earnings per share were $13.59 for the fourth
quarter of 2020 compared to $9.55 for the same period a year ago.
Net interest income was $358.7 million , an increase of $31.6 million , or 9.7%,
compared to the fourth quarter of 2019. The increase was primarily due to higher
loan interest income driven by SBA-PPP loans, and organic loan growth and lower
rates paid on interest-bearing liabilities. SBA-PPP loans contributed $42.2
million in interest and fee income during the quarter. This favorable impact was
partially offset by a decline in investment securities interest income as a
result of lower yields.
The taxable-equivalent net interest margin for the fourth quarter of 2020 was
3.02%, a decrease of 57 basis points from 3.59% in the same quarter in the prior
year. The margin decline was primarily due to a lower yield on interest-earning
assets, partially offset by a decline in rates paid on deposits and borrowings.
Income tax expense was $36.6 million in the fourth quarter of 2020, up from
$29.7 million in the fourth quarter of 2019. The increase in income tax expense
was a result of higher gross earnings, partially offset by a $3.5 million
decrease due to BancShares' decision to utilize an allowable alternative for
computing its 2020 federal income tax liability. An allowable alternative
provides BancShares the ability to use the federal income tax rate for certain
current year deductible amounts related to prior year FDIC -assisted acquisitions
that was applicable when these amounts were originally subjected to tax. The
effective tax rates were 21.0% and 22.5% during each of these respective
periods. Without the alternative, the effective tax rate would have been
approximately 23.0% for the fourth quarter.
Provision for credit losses was $5.4 million during the fourth quarter of 2020,
compared to $7.7 million for the fourth quarter of 2019. The $2.3 million
decrease was primarily due to limited movement in credit quality metrics and
continued low net charge-offs. The net charge-off ratio was 0.07% for the fourth
quarter of 2020, compared to 0.11% for the fourth quarter of 2019.
Noninterest income was $126.8 million for the fourth quarter of 2020, an
increase of $22.4 million from the same period of 2019. The increase was
primarily driven by an $11.8 million increase in marketable equity securities
gains, a $6.5 million increase in mortgage income and a $5.0 million increase in
gain on sale of investment securities available for sale. These increases were
partially offset by a decrease of $4.3 million in service charges on deposit
accounts.
Noninterest expense was $305.4 million for the fourth quarter of 2020, an
increase of $13.1 million from the same quarter last year, largely due to an
$8.7 million increase in personnel expense, primarily related to merit increases
as well as personnel additions from acquisitions, a $3.8 million increase in
occupancy expense, primarily due to enhanced cleaning and sanitation efforts in
response to the COVID-19 pandemic, and a $3.7 million increase in processing
fees paid to third parties.
Table 26 provides quarterly information for each quarter in 2020 and 2019. Table
27 provides the taxable equivalent rate/volume variance analysis between the
fourth quarter of 2020 and 2019.
55
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Table 27
SELECTED QUARTERLY DATA
2020 2019(1)
(Dollars in thousands, except share data Fourth Third Second First Fourth Third Second First
and ratios) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
SUMMARY OF OPERATIONS
Interest income $ 376,876 $
374,334
18,160 20,675 25,863 31,159 26,924 25,893 23,373 16,452
Net interest income 358,716 353,659 337,394 338,400 327,124 336,425 327,348 320,472
Provision for credit losses 5,403 4,042 20,552 28,355 7,727 6,766 5,198 11,750
Net interest income after provision for
credit losses 353,313 349,617 316,842 310,045 319,397 329,659 322,150 308,722
Noninterest income 126,765 120,572 165,402 64,011 104,393 100,930 106,875 103,663
Noninterest expense 305,373 291,662 291,679 299,971 292,262 270,425 273,397 267,657
Income before income taxes 174,705 178,527 190,565 74,085 131,528 160,164 155,628 144,728
Income taxes 36,621 35,843 36,779 16,916 29,654 35,385 36,269 33,369
Net income 138,084 142,684 153,786 57,169 101,874 124,779 119,359 111,359
Net income available to common
shareholders $ 133,448 $
138,048
$ 13.59 $
14.03
0.47 0.40 0.40 0.40 0.40 0.40 0.40 0.40
Market price at period end (Class A) 574.27 318.78 405.02 332.87 532.21 471.55 450.27 407.20
Book value at period-end 396.21 380.43 367.57 351.90 337.38 327.86 319.74 309.46
SELECTED QUARTERLY AVERAGE BALANCES
Total assets $ 49,557,803 $
48,262,155
9,889,124 9,930,197 8,928,467 7,453,159 7,120,023 6,956,981 6,803,570 6,790,671
Loans and leases(2) 32,964,390 32,694,996 31,635,958 29,098,101 27,508,062 26,977,476 26,597,242 25,515,988
Interest-earning assets 46,922,823 45,617,376 42,795,781 38,004,341 36,032,680 35,293,979 34,674,842 33,432,162 Deposits 43,123,312 41,905,844 39,146,415 34,750,061 33,295,141 32,647,264 32,100,210 30,802,567 Interest-bearing liabilities 26,401,222 25,591,707 24,407,285 23,153,777 20,958,943 20,551,393 20,397,445
19,655,434
Securities sold under customer repurchase agreements 684,311 710,237 659,244 474,231 495,804 533,371 556,374 538,162 Other short-term borrowings - - 45,549 157,759 28,284 23,236 40,513 - Long-term borrowings 1,250,682 1,256,331 1,275,928 961,132 467,223 384,047 371,843 344,225 Common shareholders' equity 3,786,158 3,679,138 3,648,284 3,625,975 3,570,872 3,580,235 3,546,041 3,509,746 Shareholders' equity$ 4,126,095 $
4,019,075
9,816,405 9,836,629 10,105,520 10,473,119 10,708,084 11,060,462 11,286,520 11,519,008
SELECTED QUARTER-END BALANCES
Total assets $ 49,957,680 $
48,666,873
9,922,905 9,860,594 9,508,476 8,845,197 7,173,003 7,167,680 6,695,578 6,914,513
Loans and leases 32,791,975 32,845,144 32,418,425 29,240,959 28,881,496 27,196,511 26,728,237 25,463,785
Deposits 43,431,609 42,250,606 41,479,245 35,346,711 34,431,236 32,743,277 32,719,671 31,198,093
Securities sold under customer repurchase
agreements 641,487 693,889 740,276 540,362 442,956 522,195 544,527 508,508
Other short-term borrowings - - - 105,000 295,277 - - -
Long-term borrowings 1,248,163 1,252,016 1,258,719 1,297,132 588,638 453,876 369,854 341,108
Shareholders' equity $ 4,229,268 $
4,074,414
9,816,405 9,816,405 9,934,105 10,280,105 10,629,495 10,884,005 11,179,905 11,385,405
SELECTED RATIOS AND OTHER DATA
Rate of return on average assets
(annualized) 1.11 % 1.18 % 1.36 % 0.57 % 1.05 % 1.32 % 1.29 % 1.27 %
Rate of return on average shareholders'
equity (annualized) 14.02 14.93 16.43 6.34 11.32 13.83 13.50 12.86
Net yield on interest-earning assets
(taxable equivalent) 3.02 3.06 3.14 3.55 3.59 3.77 3.77 3.86
Allowance for credit losses to total
loans and leases:
PCD 5.18 5.07 5.07 4.80 1.35 1.34 1.51 1.61
Non-PCD 0.62 0.61 0.61 0.64 0.77 0.82 0.83 0.88
Total 0.68 0.68 0.69 0.72 0.78 0.83 0.85 0.90
Ratio of total nonperforming assets to
total loans, leases and other real estate
owned 0.74 0.73 0.77 0.79 0.58 0.57 0.56 0.53
Total risk-based capital ratio 13.81 13.70 13.63 13.65 12.12 13.09 13.34 14.02
Tier 1 risk-based capital ratio 11.63 11.48 11.38 11.43 10.86 11.80 12.03 12.69
Tier 1 common equity ratio 10.61 10.43 10.32 10.36 10.86 11.80 12.03 12.69
Tier 1 leverage capital ratio 7.86 7.80 8.07 8.98 8.81 9.18 9.35 9.80
Dividend payout ratio 3.46 2.85 2.71 7.33 4.19 3.55 3.79 4.14
Average loans and leases to average
deposits 76.44 78.02 80.81 83.74 82.62 82.63 82.86 82.84
(1) We adopted ASC Topic 326 ("CECL") utilizing the modified retrospective
approach. We did not restate selected financial data for the quarters prior to
2020 presented above.
(2) Average loan and lease balances include PCI loans, non-PCI loans and leases,
loans held for sale and nonaccrual loans and leases.
56
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Table 28
CONSOLIDATED TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS - FOURTH QUARTER
2020 2019 Increase (decrease) due to:
Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Yield/ Total
(Dollars in thousands, taxable
equivalent) Balance Expense Rate(2) Balance Expense Rate Volume Rate Change
Assets
Loans and leases(1) $ 32,964,390 $ 345,300 4.12 % $ 27,508,062 $ 308,832 4.42 % $ 66,088 $ (29,620) $ 36,468
Investment securities:
U.S. Treasury 526,072 250 0.19 595,515 3,706 2.47 (441) (3,015) (3,456)
Government agency 695,757 1,574 0.90 659,857 4,224 2.56 230 (2,880) (2,650)
Mortgage-backed securities 7,981,834 21,130 1.06 5,563,653 29,964 2.15 13,286 (22,120) (8,834)
Corporate bonds 591,780 7,657 5.18 172,424 2,165 5.02 5,266 226 5,492
Other investments 93,681 600 2.55 128,574 653 2.02 (174) 121 (53)
Total investment securities 9,889,124 31,211 1.26 7,120,023 40,712 2.29 18,167 (27,668) (9,501)
Overnight investments 4,069,309 1,019 0.10 1,404,595 5,425 1.53 10,248 (14,654) (4,406)
Total interest-earning assets 46,922,823
3.17 % 36,032,680$ 354,969 3.89 %$ 94,503 $ (71,942) $ 22,561 Cash and due from banks 325,890 255,963 Premises and equipment 1,262,831 1,229,445 Allowance for credit losses (225,339) (225,170) Other real estate owned 50,949 44,134 Other assets 1,220,649 989,589 Total assets$ 49,557,803 $ 38,326,641 Liabilities Interest-bearing deposits: Checking with interest$ 9,688,744 $ 1,533 0.06 %$ 7,608,857 $ 1,561 0.08 %$ 421 $ (449) $ (28) Savings 3,230,625 306 0.04 2,596,608 439 0.07 106 (239) (133) Money market accounts 8,529,816 3,242 0.15 6,248,735 7,066 0.45 2,553 (6,377) (3,824) Time deposits 3,017,044 5,976 0.79 3,513,432 13,367 1.51 (1,920) (5,471) (7,391) Total interest-bearing deposits 24,466,229 11,057 0.18 19,967,632 22,433 0.45 1,160 (12,536) (11,376) Securities sold under customer repurchase agreements 684,311 374 0.22 495,804 479 0.38 180 (285) (105) Other short-term borrowings - - - 28,284 190 2.63 (190) - (190) Long-term borrowings 1,250,682 6,729 2.13 467,223 3,822 3.20 7,058 (4,151) 2,907 Total interest-bearing liabilities 26,401,222 18,160 0.27 20,958,943 26,924 0.51 8,208 (16,972) (8,764) Demand deposits 18,657,083 13,327,509 Other liabilities 373,403 469,317 Shareholders' equity 4,126,095 3,570,872 Total liabilities and shareholders' equity$ 49,557,803 $ 38,326,641 Interest rate spread 2.90 % 3.38 % Net interest income and net yield on interest-earning assets$ 359,370 3.02 %$ 328,045 3.59 %
(1)Loans and leases include PCI loans and non-PCI loans, nonaccrual loans and loans held for sale. Interest income on loans and leases includes accretion income and loan fees. Loan fees were$39.8 million and$3.0 million for the three months endedDecember 31, 2020 , and 2019, respectively. (2)Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax rates of 21.0% as well as state income tax rates of 3.5% and 3.9% for the three months endedDecember 31, 2020 , and 2019, respectively. The taxable-equivalent adjustment was$654 thousand and$921 thousand for the three months endedDecember 31, 2020 , and 2019, respectively. 57 --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of First Citizens BancShares, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of First Citizens
BancShares, Inc. and Subsidiaries (the "Company") as of December 31, 2020 and
2019, the related consolidated statements of income, comprehensive income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2020 , and related notes (collectively referred to
as the "consolidated financial statements"). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2020 and 2019, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2020 , in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States ) ("PCAOB"), the Company's internal
control over financial reporting as of December 31, 2020 , based on criteria
established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 24, 2021 expressed an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Notes A and E to the consolidated financial statements, the
Company changed its method of accounting for credit losses effective January 1,
2020 due to the adoption of Accounting Standards Codification (ASC) Topic 326
Financial Instruments - Credit Losses.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the Company's
consolidated financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses (ACL)
The Company's loans and leases portfolio totaled$32.8 billion and the associated allowance for credit losses (ACL) was$224.3 million atDecember 31, 2020 . As described in Note A, the Company adopted ASC 326, Financial Instruments - Credit Losses as ofJanuary 1, 2020 . As described in Notes A and E of the consolidated financial statements, the ACL represents management's best estimate of credit losses expected over the life of the loan, adjusted for expected contractual payments and estimated prepayments. Loans within the various reporting classes are segregated into pools with similar risk characteristics and each have a model that is utilized to estimate the ACL. These models estimate the probability of default and loss given default 58 -------------------------------------------------------------------------------- for individual loans within each pool based on historical loss experience, borrower characteristics, collateral type, forecasts of relevant economic conditions, expected future recoveries and other factors. The Company uses a two-year reasonable and supportable forecast period which incorporates macroeconomic forecasts. Significant economic factors used in estimating the expected losses include unemployment, gross domestic product, home price and commercial real estate indices. A twelve month straight-line reversion period to historical averages is used for model inputs, however for the commercial card and certain consumer portfolios, immediate reversion to historical net loss rates is utilized. Model outputs may be adjusted through a qualitative assessment to reflect economic conditions and trends not captured within the models including credit quality, concentrations, and significant policy and underwriting changes. We identified the ACL for loans and leases as a critical audit matter. The principal considerations for our determination of the ACL for loans and leases as a critical audit matter includes the subjectivity, complexity and estimation uncertainty involved in determining significant model assumptions and adjusting model outputs to reflect economic and portfolio trends and conditions not captured within the models. This required a high degree of auditor effort, including specialized skills and knowledge, and subjective and complex auditor judgment in evaluating the estimated credit losses for the loan and lease portfolios.
The primary procedures we performed to address this critical audit matter included:
•We obtained an understanding of the Company's models and the process for establishing the ACL for the loan and lease portfolio, tested the design and operating effectiveness of controls relating to management's determination of the ACL for loans and leases, including controls over the ACL models and the inputs and assumptions used to support the reserve calculations. Controls over the models include review of the model calculations, the macro-economic forecasts utilized in the models which also included sensitivity and other analysis by management as it relates to unemployment, gross domestic product, home price indices and commercial real estate indices, as well as monitoring of past due trends and adversely classified assets as well as risk ratings by industry. Additionally, we tested controls over the approval of key policies and decisions during the implementation of the new accounting standard and validation of the models. •We involved valuation specialists to test the appropriateness of the design and operation of the models, including recalculations of modeled ACL reserves on certain portfolios. •We evaluated the reasonableness of management's application of industry and qualitative factor adjustments to the ACL, including the comparison of factors considered by management to third party or internal sources as well as evaluated the appropriateness and level of the qualitative factor adjustments. •We assessed the overall trends in credit quality by comparing the Company's year-over-year and quarterly changes in qualitative factors and the ACL. •We evaluated management's determination of reasonable and supportable forecasts, including comparing key factors to independent sources as well as involving our valuation specialists in testing the application of forecasts in the model calculation. •We evaluated subsequent events and transactions and considered whether they corroborated or contradicted the Company's conclusion. /s/Dixon Hughes Goodman LLP We have served as the Company's auditor since 2004.Raleigh, North Carolina February 24, 2021 59 -------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders ofFirst Citizens BancShares, Inc. Opinion on Internal Control Over Financial Reporting We have auditedFirst Citizens BancShares, Inc. and Subsidiaries' (the "Company") internal control over financial reporting as ofDecember 31, 2020 , based on criteria established in Internal Control-Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of theTreadway Commission . In our opinion,First Citizens BancShares, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as ofDecember 31, 2020 , based on the criteria established in Internal Control - Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of theTreadway Commission . We also have audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States ) ("PCAOB"), the consolidated financial statements of the Company as ofDecember 31, 2020 and 2019 and for each of the three years in the period endedDecember 31, 2020 , and our report datedFebruary 24, 2021 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. As described in Management's Annual Report on Internal Control Over Financial Reporting, the scope of management's assessment of internal control over financial reporting as ofDecember 31, 2020 has excludedCommunity Financial Holding Company, Inc. acquired onFebruary 1, 2020 . We have also excludedCommunity Financial Holding Company, Inc. from the scope of our audit of internal control over financial reporting.Community Financial Holding Company, Inc. represented 0.34 percent and 0.22 percent of consolidated revenues (total interest income and total noninterest income) and consolidated total assets, respectively, for the year endedDecember 31, 2020 .
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
60
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Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ Dixon Hughes Goodman LLP
Raleigh, North Carolina
February 24, 2021
61
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First Citizens BancShares, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share data) December 31, 2020 December 31, 2019
Assets
Cash and due from banks $ 362,048 $ 376,719
Overnight investments 4,347,336 1,107,844
Investment in marketable equity securities (cost of
91,680 82,333
Investment securities available for sale (cost of
7,014,243 7,059,674
Investment securities held to maturity (fair value of
$2,838,499 at December 31, 2020 and $30,996 at December 31,
2019) 2,816,982 30,996
Loans held for sale 124,837 67,869
Loans and leases 32,791,975 28,881,496
Allowance for credit losses (224,314) (225,141)
Net loans and leases 32,567,661 28,656,355
Premises and equipment 1,251,283 1,244,396
Other real estate owned 50,890 46,591
Income earned not collected 145,694 123,154
Goodwill 350,298 349,398
Other intangible assets 50,775 68,276
Other assets 783,953 610,891
Total assets $ 49,957,680 $ 39,824,496
Liabilities
Deposits:
Noninterest-bearing $ 18,014,029 $ 12,926,796
Interest-bearing 25,417,580 21,504,440
Total deposits 43,431,609 34,431,236
Securities sold under customer repurchase agreements 641,487 442,956
Federal Home Loan Bank borrowings 655,175 572,185
Subordinated debt 504,518 163,412
Other borrowings 88,470 148,318
FDIC shared-loss payable 15,601 112,395
Other liabilities 391,552 367,810
Total liabilities 45,728,412 36,238,312
Shareholders' equity
Common stock:
Class A - $1 par value (16,000,000 shares authorized; 8,811,220
and 9,624,310 shares issued and outstanding at December 31,
2020 and December 31, 2019, respectively) 8,811 9,624
Class B -
1,005 1,005
Preferred stock -
339,937 - Surplus - 44,081 Retained earnings 3,867,252 3,658,197 Accumulated other comprehensive income (loss) 12,263 (126,723) Total shareholders' equity 4,229,268 3,586,184 Total liabilities and shareholders' equity $
49,957,680
See accompanying Notes to Consolidated Financial Statements.
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First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Income
Year ended December 31
(Dollars in thousands, except share and per share data) 2020 2019 2018
Interest income
Loans and leases $
1,332,720
144,459 160,460 150,709
Overnight investments 6,847 26,245 21,997
Total interest income 1,484,026 1,404,011 1,245,757
Interest expense
Deposits 66,635 76,254 22,483
Securities sold under customer repurchase agreements 1,610 1,995 1,594
Federal Home Loan Bank borrowings 9,763 5,472 5,801
Subordinated debt 16,074 7,099 6,277
Other borrowings 1,775 1,822 702
Total interest expense 95,857 92,642 36,857
Net interest income 1,388,169 1,311,369 1,208,900
Provision for credit losses 58,352 31,441 28,468
Net interest income after provision for credit losses 1,329,817 1,279,928 1,180,432
Noninterest income
Wealth management services 102,776 99,241 97,966
Service charges on deposit accounts 87,662 105,191 105,486
Cardholder services, net 74,291 69,078 65,478
Mortgage income 39,592 21,126 16,433
Other service charges and fees 30,911 31,644 30,606
Merchant services, net 24,122 24,304 24,504
Insurance commissions 14,544 12,810 12,702
ATM income 5,758 6,296 7,980
Realized gains on investment securities available for sale, net 60,253
7,115 351
Marketable equity securities gains (losses), net 29,395 20,625 (7,610)
Gain on extinguishment of debt - - 26,553
Other 7,446 18,431 19,700
Total noninterest income 476,750 415,861 400,149
Noninterest expense
Salaries and wages 590,020 551,112 527,691
Employee benefits 132,244 120,501 118,203
Occupancy expense 117,169 111,179 109,169
Equipment expense 115,535 112,290 102,909
Processing fees paid to third parties 44,791 29,552 30,017
FDIC insurance expense 12,701 10,664 18,890
Collection and foreclosure-related expenses 13,658 11,994 16,567
Merger-related expenses 17,450 17,166 6,462
Other 145,117 139,283 147,063
Total noninterest expense 1,188,685 1,103,741 1,076,971
Income before income taxes 617,882 592,048 503,610
Income taxes 126,159 134,677 103,297
Net income $ 491,723 $ 457,371 $ 400,313
Less: Preferred stock dividends 14,062 - -
Net income available to common shareholders $ 477,661 $ 457,371 $ 400,313
Weighted average common shares outstanding 10,056,654 11,141,069 11,938,439
Earnings per common share $ 47.50 $ 41.05 $ 33.53
Dividends declared per common share 1.67 1.60 1.45
See accompanying Notes to Consolidated Financial Statements.
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First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Year ended December 31
2020 2019 2018
(Dollars in thousands)
Net income $ 491,723 $ 457,371 $ 400,313
Other comprehensive income
Unrealized gains on securities available for sale:
Unrealized gains on securities available for sale arising during
the period 155,009 64,644 29,170
Tax effect (35,652) (14,868) (6,709)
Reclassification adjustment for realized gains on securities available for sale included in income before income taxes (60,253)
(7,115) (351)
Tax effect 13,858 1,636 81
Unrealized gains on securities available for sale arising during the period, net of tax
72,962 44,297 22,191
Unrealized gains (losses) on securities available for sale transferred from/to held to maturity: Unrealized gains (losses) on securities available for sale transferred from/to held to maturity
5,894 72,512 (109,507)
Tax effect (1,356) (16,678) 25,186
Reclassification adjustment for accretion of unrealized (gains) losses on securities available for sale transferred to held to maturity
(495) 19,889 17,106
Tax effect 114 (4,574) (3,934)
Total change in unrealized gains (losses) on securities available for sale transferred to held to maturity, net of tax 4,157
71,149 (71,149)
Defined benefit pension items:
Actuarial gains (losses) arising during the period 55,023 (20,049) (32,012)
Tax effect (12,656) 4,611 7,363
Amortization of actuarial losses and prior service cost 25,324 10,981 13,981
Tax effect (5,824) (2,525) (3,216)
Total change from defined benefit plans, net of tax 61,867 (6,982) (13,884)
Other comprehensive income (loss) 138,986 108,464 (62,842)
Total comprehensive income $ 630,709 $ 565,835 $ 337,471
See accompanying Notes to Consolidated Financial Statements.
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First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Accumulated
Other Total
Class A Class B Preferred Retained Comprehensive Shareholders'
Common Stock Common Stock Stock Surplus Earnings Income (Loss) Equity
(Dollars in thousands, except
share and per share data)
Balance at December 31, 2017 $ 11,005 $ 1,005 $ - $ 658,918 $ 2,785,430 $ (122,294) $ 3,334,064
Cumulative effect of adoption
of ASU 2016-01 - - - - 18,715 (18,715) -
Cumulative effect of adoption
of ASU 2018-02 - - - - 31,336 (31,336) -
Net income - - - - 400,313 - 400,313
Other comprehensive loss, net
of tax - - - - - (62,842) (62,842)
Repurchase of 382,000 shares
of Class A common stock (382) - - (164,956) - - (165,338)
Cash dividends declared ($1.45
per common share)
Class A common stock - - - - (15,785) - (15,785)
Class B common stock - - - - (1,458) - (1,458)
Balance at December 31, 2018 10,623 1,005 - 493,962 3,218,551 (235,187) 3,488,954
Net income - - - - 457,371 - 457,371
Other comprehensive income,
net of tax - - - - - 108,464 108,464
Repurchase of 998,910 shares
of Class A common stock (999) - - (449,881) - - (450,880)
Cash dividends declared ($1.60
per common share)
Class A common stock - - - - (16,117) - (16,117)
Class B common stock - - - - (1,608) - (1,608)
Balance at December 31, 2019 9,624 1,005 - 44,081 3,658,197 (126,723) 3,586,184
Cumulative effect of adoption
of ASC 326 - - - - 36,943 - 36,943
Net income - - - - 491,723 - 491,723
Other comprehensive income,
net of tax - - - - - 138,986 138,986
Issuance of preferred stock - - 339,937 - - - 339,937
Repurchase of 813,090 shares
of Class A common stock (813) - - (44,081) (288,861) - (333,755)
Cash dividends declared ($1.67
per common share)
Class A common stock - - - - (15,010) - (15,010)
Class B common stock - - - - (1,678) - (1,678)
Preferred stock dividends
declared - - - - (14,062) - (14,062)
Balance at
$ 339,937 $ -$ 3,867,252 $ 12,263 $ 4,229,268 See accompanying Notes to Consolidated Financial Statements. 65
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First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
(Dollars in thousands) 2020 2019 2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $
491,723
58,352 31,441 28,468
Deferred tax (benefit) expense (25,535) 54,598 (13,377)
Net (increase) decrease in current tax receivable (5,894) (19,564) 23,353
Depreciation and amortization 108,641 103,828 96,781
Net (decrease) increase in accrued interest payable (8,683) 14,412 (240)
Net increase in income earned not collected (21,982) (4,151) (10,785)
Contribution to pension plans (100,000) (3,592) (50,000)
Realized gains on investment securities available for sale, net (60,253) (7,115) (351)
Marketable equity securities (gains) losses, net (29,395) (20,625) 7,610
Gain on extinguishment of debt - - (26,553)
Origination of loans held for sale (1,078,096) (736,015) (593,307)
Proceeds from sale of loans held for sale 1,045,937 731,803 608,549
Gain on sale of loans (37,594) (15,183) (11,210)
Net write-downs/losses on other real estate owned 4,056 2,664 4,390
Net accretion of premiums and discounts (8,513) (27,263) (32,291)
Amortization of intangible assets 32,801 23,861 23,648
Net change in mortgage servicing rights (12,149) (5,927) (5,258)
Net change in other assets (7,286) (24,274) (5,076)
Net change in other liabilities (6,115) (15,992) 9,105
Net cash provided by operating activities 340,015 540,277 453,769
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans outstanding (3,803,188) (1,282,880) (1,023,885)
Purchases of investment securities available for sale (8,678,543) (4,705,038) (1,451,287)
Purchases of investment securities held to maturity (1,633,165) (223,598) (97,827)
Purchases of marketable equity securities (333,140) (26,166) (2,818)
Proceeds from maturities, calls, and principal repayments of investment securities held to maturity
301,347 341,077 296,632
Proceeds from maturities, calls, and principal repayments of investment securities available for sale
2,791,291 2,345,512 1,664,730
Proceeds from sales of investment securities available for sale 4,585,002
2,308,856 360,218
Proceeds from sales of marketable equity securities 352,835 56,749 9,528
Net (increase) decrease in overnight investments (3,204,363) (65,181) 601,979
Proceeds from sales of loans held for investment 13,368 24,247 9,591
Cash paid to FDIC for settlement of shared-loss agreement (99,468) - -
Proceeds from sales of other real estate owned 28,280 25,918 28,128
Proceeds from sales of premises and equipment 1,369 132 1,721
Purchases of premises and equipment (133,384) (121,077) (140,444)
Business acquisitions, net of cash acquired (59,999) (236,728) (155,126)
Net cash (used in) provided by investing activities (9,871,758) (1,558,177) 101,140
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in time deposits (1,010,190) 284,611 33,023
Net increase in demand and other interest-bearing deposits 9,989,107 1,154,815 457,196
Net decrease in short-term borrowings (96,746) (27,703) (246,517)
Repayment of long-term obligations (86,737) (73,284) (752,447)
Origination of long-term obligations 400,000 200,000 125,000
Net proceeds from subordinated notes issuance 345,849 - -
Net proceeds from preferred stock issuance 339,937 - -
Repurchase of common stock (333,755) (453,123) (163,095)
Cash dividends paid (30,393) (18,137) (16,779)
Net cash provided by (used in) financing activities 9,517,072 1,067,179 (563,619)
Change in cash and due from banks (14,671) 49,279 (8,710)
Cash and due from banks at beginning of period 376,719 327,440 336,150
Cash and due from banks at end of period $ 362,048 $ 376,719 $ 327,440
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $
104,567
116,583 83,038 73,806
Significant noncash investing and financing activities: Transfers of loans to other real estate
11,635 14,639 23,375
Dividends declared but not paid 4,613 4,256 4,668
Net reclassification of portfolio loans from (to) loans held for sale
1,687 22,034 (2,433)
Transfer of investment securities available for sale to (from) held to maturity
1,460,745 (2,080,617) 2,485,761
Transfer of investment securities available for sale to marketable equity securities
- - 107,578
Transfers of premises and equipment to other real estate 15,187 7,045 1,622
Premises and equipment acquired through finance leases and other financing arrangements
- - 12,196
Unsettled common stock repurchases - - 2,243
See accompanying Notes to Consolidated Financial Statements.
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First Citizens BancShares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE A
ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Nature of Operations
First Citizens BancShares, Inc. ("we," "us," "our," "BancShares,") is a
financial holding company organized under the laws of Delaware and conducts
operations through its banking subsidiary, First-Citizens Bank & Trust Company
("FCB," or "the Bank"), which is headquartered in Raleigh, North Carolina .
BancShares and its subsidiaries operate 542 branches in 19 states predominantly
located in the Southeast, Mid-Atlantic, Midwest and Western United States (the
"U.S."). BancShares seeks to meet the financial needs of individuals and
commercial entities in its market areas through a wide range of retail and
commercial banking services. Loan services include various types of commercial,
business and consumer lending. Deposit services include checking, savings, money
market and time deposit accounts. First Citizens Wealth Management provides
holistic, goals-based advisory services encompassing a broad range of client
deliverables. These deliverables include wealth planning, discretionary
investment advisory services, insurance, brokerage, defined benefit and defined
contribution services, private banking, trust, fiduciary, philanthropy and
special asset services.
Principles of Consolidation and Basis of Presentation
The accounting and reporting policies of BancShares and its subsidiaries are in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") and general practices within the banking industry.
The consolidated financial statements of BancShares include the accounts of
BancShares and its subsidiaries, certain partnership interests and variable
interest entities. All significant intercompany accounts and transactions are
eliminated upon consolidation. BancShares operates with centralized management
and combined reporting; thus, BancShares operates as one consolidated reportable
segment.
Variable interest entities ("VIE") are legal entities that either do not have
sufficient equity to finance their activities without the support from other
parties or whose equity investors lack a controlling financial interest. FCB has
investments in certain partnerships and limited liability entities that have
been evaluated and determined to be VIEs. Consolidation of a VIE is appropriate
if a reporting entity holds a controlling financial interest in the VIE and is
the primary beneficiary. FCB is not the primary beneficiary and does not hold a
controlling interest in the VIEs as it does not have the power to direct the
activities that most significantly impact the VIEs' economic performance. As
such, assets and liabilities of these entities are not consolidated into the
financial statements of BancShares. The recorded investment in these entities is
reported within other assets.
Reclassifications
In certain instances, amounts reported in prior years' consolidated financial
statements have been reclassified to conform to the current financial statement
presentation. Such reclassifications had no effect on previously reported
shareholders' equity or net income.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions impacting the amounts reported.
Actual results could differ from those estimates. The estimates BancShares
considers significant are the allowance for credit losses, fair value
measurements, and income taxes.
Business Combinations
BancShares accounts for all business combinations using the acquisition method
of accounting. Under this method, acquired assets and assumed liabilities are
included with the acquirer's accounts as of the date of acquisition, with any
excess of purchase price over the fair value of the net assets acquired
recognized as either finite lived intangibles or capitalized as goodwill. In
addition, acquisition-related and restructuring costs are recognized as period
expenses as incurred. See Note B, Business Combinations, for additional
information.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, interest-bearing
deposits with banks and federal funds sold. Cash and cash equivalents have
initial maturities of three months or less. The carrying value of cash and cash
equivalents approximates its fair value due to its short-term nature.
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FIRST CITIZENS BANCSHARES, INC. ANDSUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Debt Securities BancShares classifies debt securities as held to maturity ("HTM") or available for sale ("AFS"). Debt securities are classified as HTM when BancShares has the intent and ability to hold the securities to maturity. HTM securities are reported at amortized cost. Other debt securities are classified as AFS and reported at estimated fair value, with unrealized gains and losses, net of income taxes, reported in Accumulated Other Comprehensive Income ("AOCI"). Amortization of premiums and accretion of discounts for debt securities are recorded in interest income. Realized gains and losses from the sale of debt securities are determined by specific identification on a trade date basis and are included in noninterest income. BancShares performs pre-purchase due diligence and evaluates the credit risk of AFS and HTM debt securities purchased directly into our portfolio or via acquisition. If securities have evidence of more than insignificant credit deterioration since issuance, they are designated as purchased credit deteriorated ("PCD"). PCD debt securities are recorded at fair value at the date of acquisition, which includes an associated allowance for credit losses ("ACL") that is added to the purchase price or fair value to arrive at the Day 1 amortized cost basis. Excluding the ACL, the difference between the purchase price and the Day 1 amortized cost is amortized or accreted to interest income over the contractual life of the securities using the effective interest method. For AFS debt securities, management performs a quarterly analysis of the investment portfolio to evaluate securities currently in an unrealized loss position for potential credit-related impairment. If BancShares intends to sell a security, or does not have the intent and ability to hold a security before recovering the amortized cost, the entirety of the unrealized loss is immediately recorded in earnings. For the remaining securities, an analysis is performed to determine if any portion of the unrealized loss recorded relates to credit impairment. If credit-related impairment exists, the amount is recorded through the ACL and related provision. This review includes indicators such as changes in credit rating, delinquency, bankruptcy or other significant news event impacting the issuer. BancShares' portfolio of HTM debt securities is made up of mortgage-backed securities issued by government agencies and government sponsored entities. Given the historically strong credit rating of theU.S. Treasury and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, we determined zero expected credit losses on the HTM portfolio.Equity Securities Equity securities are recorded on a trade date basis and measured at fair value. Realized and unrealized gains and losses are determined by specific identification and are included in noninterest income. Non-marketable equity securities are securities with no readily determinable fair values and are measured at cost. BancShares evaluates its non-marketable equity securities for impairment and recoverability of the recorded investment by considering positive and negative evidence, including the profitability and asset quality of the issuer, dividend payment history and recent redemption experience. Impairment is assessed at each reporting period and if identified, is recognized in noninterest expense. Non-marketable equity securities were$11.6 million and$12.5 million atDecember 31, 2020 and 2019, respectively, and are included in other assets. Other Securities Membership in theFederal Home Loan Bank ("FHLB") network requires ownership of FHLB restricted stock. This stock is restricted as it may only be sold to the FHLB and all sales must be at par. Accordingly, the FHLB restricted stock is carried at cost, less any applicable impairment charges and is recorded within other assets. FHLB restricted stock was$45.4 million and$43.0 million atDecember 31, 2020 and 2019, respectively. Additionally, BancShares holds approximately 354,000 shares of Visa Class B common stock. Visa Class B shares are not considered to have a readily determinable fair value and are recorded at$0 . Investments in Qualified Affordable Housing Projects BancShares and FCB have investments in qualified affordable housing projects primarily for the purposes of fulfilling Community Reinvestment Act requirements and obtaining tax credits. These investments are accounted for using the proportional amortization method if certain conditions are met. Under the proportional amortization method, the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits received, and the net investment performance is recognized in the income statement as a component of income tax expense. All investments held in qualified affordable housing projects qualify for the proportional amortization method and totaled$163.9 million and$167.8 million atDecember 31, 2020 and 2019, respectively, and are included in other assets. 68
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Loans Held For Sale BancShares elected to apply the fair value option for residential mortgage loans originated to be sold to investors. Gains and losses on sales of mortgage loans are recognized within mortgage income. Loans and Leases BancShares' accounting methods for loans and leases depends on whether they are originated or purchased, and if purchased, whether or not the loans reflect more than insignificant credit deterioration since origination as of the date of acquisition. Non-Purchased Credit Deteriorated Loans Non-Purchased Credit Deteriorated ("Non-PCD") loans consist of loans originated by BancShares and loans purchased from other institutions that do not reflect more than insignificant credit deterioration at acquisition. Originated loans for which management has the intent and ability to hold for the foreseeable future are classified as held for investment and carried at the principal amount outstanding net of any unearned income, charge-offs and unamortized fees and costs. Nonrefundable fees collected and certain direct costs incurred related to loan originations are deferred and recorded as an adjustment to loans outstanding. The net amount of the nonrefundable fees and costs is amortized to interest income over the contractual lives using methods that approximate a constant yield. Purchased loans which do not reflect more than insignificant credit deterioration at acquisition are classified as non-PCD loans. These loans are recorded at fair value at the date of acquisition and an initial allowance is recorded on these assets as provision expense at the date of acquisition. The difference between the fair value and the unpaid principal balance at the acquisition date is amortized or accreted to interest income over the contractual life of the loan using the effective interest method. Purchased Credit Deteriorated Loans Purchased loans which reflect a more than insignificant credit deterioration since origination as of the date of acquisition are classified as PCD and are recorded at acquisition-date amortized cost, which is the purchase price or fair value in a business combination, plus our initial ACL. Excluding the ACL, the difference between the unpaid principal balance and the acquisition date amortized cost is amortized or accreted to interest income over the contractual life of the loan using the effective interest method. The performance of all loans within the BancShares portfolio is subject to a number of external risks, including but not limited to changes in the overall health of the economy, declines in real estate or other collateral values, changes in the demand for products and services and personal events, such as death, disability or change in marital status. BancShares evaluates and reports its non-PCD and PCD loan portfolios separately, and each non-PCD portfolio is further divided into commercial and consumer segments based on the type of borrower, purpose, collateral and/or our underlying credit management processes. Additionally, non-PCD commercial and consumer loans are assigned to loan classes, which further disaggregate the loan portfolio. PCD loans are reported as a single loan segment and class. Upon adoption of Accounting Standard Codification ("ASC") 326, owner occupied and non-owner occupied commercial real estate were segregated into separate classes within the commercial segment. Similarly, consumer auto was segregated into its own class within the consumer segment. These enhancements were made to capture the unique credit characteristics used in our current expected credit loss ("CECL") models. Information for reporting periods beginning afterJanuary 1, 2020 are presented in accordance with ASC 326 and reflect changes to the respective classes, while prior period amounts continue to be reported in accordance with previously applicable GAAP and have not been reclassified to conform to the current financial statement presentation. 69
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Small Business Administration Paycheck Protection Program The Small Business Administration Paycheck Protection Program ("SBA-PPP") is one of the centerpieces of the Coronavirus Aid Relief and Economic Security Act (the "CARES Act"), which was passed onMarch 27, 2020 in response to the outbreak of coronavirus ("COVID-19") and was supplemented with subsequent legislation. Overseen by theU.S. Treasury Department , the SBA-PPP offered cash-flow assistance to nonprofit and small business employers through guaranteed loans for expenses incurred betweenFebruary 15, 2020 , andAugust 8, 2020 . Borrowers are eligible for forgiveness of principal and accrued interest on SBA-PPP loans to the extent that the proceeds were used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of between eight and 24-weeks after the loan was made as long as the borrower retains its employees and their compensation levels. The CARES Act authorized the SBA to temporarily guarantee these loans. The SBA began processing forgiveness payments during the fourth quarter of 2020. The Consolidated Apportions Act 2021 was signed into law during the fourth quarter of 2020 and contained provisions for new funding of SBA-PPP loans. We began accepting applications for this round of funding beginning in the first quarter of 2021. Due to the unique nature of these provisions, SBA-PPP loans have been disclosed as a separate loan class. Origination fees received from the SBA are capitalized into the carrying amount of the loans. The deferred fee income, net of origination costs, is recognized over the life of the loan as an adjustment to yield using the effective interest method. The following represent our classes of loans as ofJanuary 1, 2020 upon adoption of ASC 326 (with the exception of SBA-PPP, which was added during second quarter 2020): Commercial loans and leases Construction and land development - Construction and land development consists of loans to finance land for commercial development of real property and construction of multifamily apartments or other commercial properties. These loans are highly dependent on the supply and demand for commercial real estate as well as the demand for newly constructed residential homes and lots acquired for development. Deterioration in demand could result in decreased collateral values, which could make repayments of outstanding loans difficult for customers. Owner occupied commercial mortgage - Owner occupied commercial mortgages consists of loans to purchase or refinance owner occupied nonresidential properties. This includes office buildings, other commercial facilities and farmland. Commercial mortgages secured by owner occupied properties are primarily dependent on the ability of borrowers to achieve business results consistent with those projected at loan origination. While these loans and leases are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation. Non-owner occupied commercial mortgage - Non-owner occupied commercial mortgage consists of loans to purchase or refinance investment nonresidential properties. This includes office buildings and other facilities rented or leased to unrelated parties, as well as farmland and multifamily properties. The primary risk associated with income producing commercial mortgage loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. While these loans and leases are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation. Commercial and industrial and leases - Commercial and industrial loans consist of loans or lines of credit to finance accounts receivable, inventory or other general business needs, business credit cards, and lease financing agreements for equipment, vehicles, or other assets. The primary risk associated with commercial and industrial and lease financing loans is the ability of borrowers to achieve business results consistent with those projected at origination. Failure to achieve these projections presents risk the borrower will be unable to service the debt consistent with the contractual terms of the loan or lease. SBA-PPP - These loans were originated as part of the SBA-PPP to finance payroll and other costs for nonprofit and small businesses impacted by the COVID-19 pandemic. These loans are guaranteed by the SBA and borrowers have the ability to qualify for loan forgiveness through theU.S. Treasury . Consumer loans Residential mortgage - Residential mortgage consists of loans to purchase or refinance the borrower's primary dwelling, secondary residence or vacation home and are often secured by 1-4 family residential properties. Significant and rapid declines in real estate values can result in borrowers having debt levels in excess of the current market value of the collateral. 70
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Revolving mortgage - Revolving mortgage consists of home equity lines of credit and other lines of credit or loans secured by first or second liens on the borrower's primary residence. These loans are secured by both senior and junior liens on the residential real estate and are particularly susceptible to declining collateral values. This risk is elevated for loans secured by junior lines as a substantial decline in value could render the junior lien position effectively unsecured. Construction and land development - Construction and land development consists of loans to construct a borrower's primary or secondary residence or vacant land upon which the owner intends to construct a dwelling at a future date. These loans are typically secured by undeveloped or partially developed land in anticipation of completing construction of a 1-4 family residential property. There is risk these construction and development projects can experience delays and cost overruns exceeding the borrower's financial ability to complete the project. Such cost overruns can result in foreclosure of partially completed and unmarketable collateral. Consumer auto loans - Consumer auto loans consist of installment loans to finance purchases of vehicles. These loans include direct auto loans originated in bank branches, as well indirect auto loans originated through agreements with auto dealerships. The value of the underlying collateral within this class is at risk of potential rapid depreciation which could result in unpaid balances in excess of the collateral. Other consumer - Other consumer loans consist of loans to finance unsecured home improvements, student loans and revolving lines of credit that can be secured or unsecured, including personal credit cards. The value of the underlying collateral within this class is at risk of potential rapid depreciation which could result in unpaid balances in excess of the collateral. Loans and Leases - (Prior to Adoption of ASC 326) Prior to the adoption of ASC 326, BancShares' accounting methods for loans and leases depended on whether they were originated or purchased, and if purchased, whether or not the loans reflected credit deterioration at the date of acquisition. Non-Purchased Credit Impaired ("Non-PCI") Loans Non-PCI loans consisted of loans originated by BancShares or loans purchased from other institutions that did not reflect credit deterioration at acquisition. Originated loans for which management had the intent and ability to hold for the foreseeable future were classified as held for investment and carried at the principal amount outstanding net of any unearned income, charge-offs and unamortized fees and costs. Nonrefundable fees collected and certain direct costs incurred related to loan originations were deferred and recorded as an adjustment to loans outstanding. The net amount of the nonrefundable fees and costs was amortized to interest income over the contractual lives using methods that approximated a constant yield. Purchased loans which did not reflect credit deterioration at acquisition were classified as non-PCI loans. These loans were recorded at fair value at the date of acquisition. The difference between the fair value and the unpaid principal balance at the acquisition date was amortized or accreted to interest income over the contractual life of the loan using the effective interest method. Purchased Credit Impaired ("PCI") Loans Purchased loans which reflected credit deterioration since origination, such that it was probable at acquisition that BancShares would be unable to collect all contractually required payments, were classified as PCI loans. PCI loans were recorded at fair value at the date of acquisition. If the timing and amount of the future cash flows could be reasonably estimated, any excess of cash flows expected at acquisition over the estimated fair value were recognized as interest income over the life of the loans using the effective yield method. Subsequent to the acquisition date, increases in cash flows over those expected at the acquisition date were recognized prospectively as interest income. Decreases in expected cash flows due to credit deterioration were recognized by recording an allowance for loan losses. In the event of prepayment, the remaining unamortized amount was recognized in interest income. To the extent possible, PCI loans were aggregated into pools based upon common risk characteristics and each pool was accounted for as a single unit. The performance of all loans within the BancShares portfolio was subject to a number of external risks, including changes in the overall health of the economy, declines in real estate values, changes in the demand for products and services and personal events, such as death, disability or change in marital status. BancShares evaluated and reported its non-PCI and PCI loan portfolios separately, and each portfolio was further divided into commercial and non-commercial segments based on the type of borrower, purpose, collateral and/or our underlying credit management processes. 71
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Nonperforming Assets and Troubled Debt Restructurings Nonperforming Assets Nonperforming assets ("NPAs") include nonaccrual loans, past due debt securities and other real estate owned. All loans are classified as past due when the payment of principal and interest based upon contractual terms is 30 days or greater delinquent. Loans are generally placed on nonaccrual when principal or interest becomes 90 days past due or when it is probable the principal or interest is not fully collectible. When loans are placed on nonaccrual, all previously uncollected accrued interest is reversed from interest income and the ongoing accrual of interest is discontinued. All payments received thereafter are applied as a reduction of the remaining principal balance as long as doubt exists as to the ultimate collection of the principal. Loans and leases are generally removed from nonaccrual status when they become current for a sustained period of time and there is no longer concern as to the collectability of principal and interest. Debt securities are also classified as past due when the payment of principal and interest based upon contractual terms is 30 days delinquent or greater. Missed interest payments on debt securities are rare. We review all debt securities with delinquent interest and immediately charge off any accrued interest determined to be uncollectible. Troubled Debt Restructurings A loan is considered a troubled debt restructuring ("TDR") when both a modification to a borrower's debt agreement is made and a concession is granted for economic or legal reasons related to a borrower's financial difficulties that otherwise would not be granted. TDR concessions could include short-term deferrals of interest, modifications of payment terms or, in certain limited instances, forgiveness of principal or interest. Loans restructured as a TDR are treated and reported as such for the remaining life of the loan. TDR loans can be nonaccrual or accrual, depending on the individual facts and circumstances of the borrower. In circumstances where a portion of the loan balance is charged-off, the remaining balance is typically classified as nonaccrual. Allowance for Credit Losses Loans Loans within the various reporting classes are segregated into pools with similar risk characteristics and models are built to estimate the ACL. These loan level ACL models estimate the probability of default and loss given default for individual loans within the risk pool based on historical loss experience, borrower characteristics, collateral type, forecasts of relevant economic conditions, expected future recoveries and other factors. Pools for estimating the ACL are aggregated into loan classes, as described above, which roll up into commercial and consumer loan segments. Non-PCD and PCD loans are modeled together within the loan level models using acquired and PCD indicator variables to provide differentiation of individual loan risk. BancShares uses a two year reasonable and supportable forecast period which incorporates economic forecasts at the time of evaluation. For most pools, BancShares uses a 12-month straight-line reversion period to historical averages for model inputs; however for the consumer other, consumer card and commercial card pools, immediate reversion to historical net loss rates is utilized. The ACL for SBA-PPP loans originated during 2020 are separately evaluated given the explicit government guarantee. This analysis, which incorporated historical experience with similar SBA guarantees and underwriting, concluded the likelihood of loss was remote and therefore these loans were assigned a zero expected credit loss in the ACL. The ACL represents management's best estimate of credit losses expected over the life of the loan, adjusted for expected contractual payments and the impact of prepayment expectations. Prepayment assumptions were developed through a review of BancShares' historical prepayment activity and began with a review of prepayment assumptions utilized in other modeling activities. Estimates for loan losses are determined by analyzing quantitative and qualitative components present as of the evaluation date. Adjustments to the ACL are recorded with a corresponding entry to provision for credit losses. Loan balances considered uncollectible are charged-off against the ACL. Recoveries of amounts previously charged-off are credited to the ACL. A primary component of determining the ACL on loans is the actual net loss history of the various loan pools. For commercial pools, key factors utilized in the models include delinquency trends as well as macroeconomic variables such as unemployment and commercial real estate price index. For consumer pools, key factors include delinquency trends and the borrower's original credit score, as well as other macroeconomic variables such as unemployment, gross domestic product, home price index, and commercial real estate index. As the models project losses over the life of the loans, prepayment assumptions also serve as 72
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) inputs. Model outputs may be adjusted through a qualitative assessment to reflect economic conditions and trends not captured within the models including credit quality, concentrations, and significant policy and underwriting changes. Within our ACL model, TDRs meet the definition of default and are given a 100% probability of default rating. TDRs are not individually evaluated unless determined to be collateral-dependent. Therefore, loss given default is calculated based on the individual risk characteristics of the loan as defined in the model. When loans do not share risk characteristics similar to others in the pool, the ACL is evaluated on an individual basis. Given that BancShares' CECL models are loan level models, the population of loans evaluated individually is minimal and consists primarily of loans greater than$500 thousand and determined to be collateral-dependent. BancShares elected the practical expedient allowed under ASC 326 to assess the collectability of these loans, where repayment is expected to be provided substantially through operation or sale of collateral, based on the fair value of the underlying collateral. The fair value of the collateral is estimated using appraised and market values (appropriately adjusted for an assessment of the sales and marketing costs when applicable). A specific allowance is established, or partial charge-off is recorded, for the difference between the excess amortized cost of loan and the collateral's estimated fair value. Accrued Interest Receivable BancShares has elected not to measure an ACL for accrued interest receivable and has excluded it from the amortized cost basis of loans and held to maturity debt securities as our accounting policies and credit monitoring provide that uncollectible accrued interest is reversed or written off against interest income in a timely manner. Unfunded Commitments A reserve for unfunded commitments is established for off-balance sheet exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e. commitment cannot be canceled at any time). These unfunded commitments are assessed to determine both the probability of funding as well the expectation of future losses. The expected funding balance is used in the probability of default and loss given default models to determine the reserve. The reserve for unfunded commitments was$12.8 million atDecember 31, 2020 , and is recorded within other liabilities with changes recorded through other noninterest expense. Other Real Estate Owned Other Real Estate Owned ("OREO") includes foreclosed real estate property and closed branch properties and is initially recorded at the asset's estimated fair value less costs to sell. Any excess in the recorded investment in the loan over the estimated fair value less costs to sell is charged-off against the ACL at the time of foreclosure. If the estimated value of the OREO exceeds the recorded investment of the loan, the difference is recorded as a gain within other income. OREO is subsequently carried at the lower of cost or market value less estimated selling costs and is evaluated at least annually. The periodic evaluations are generally based on the appraised value of the property and may include additional adjustments based upon management's review of the valuation estimate and specific knowledge of the property. Routine maintenance costs, income and expenses related to the operation of the foreclosed asset, subsequent declines in market value and net gains or losses on disposal are included in collection and foreclosure-related expense. Payable to theFederal Deposit Insurance Corporation for Shared-Loss Agreements The purchase and assumption agreements for certainFederal Deposit Insurance Corporation ("FDIC") assisted transactions include payments that may be owed to theFDIC at the termination of the shared-loss agreements. The payment is due to theFDIC if actual cumulative losses on acquired covered assets are lower than the cumulative losses originally estimated by theFDIC at the time of acquisition. The liability is calculated by discounting estimated future payments and is reported asFDIC shared-loss payable. The ultimate settlement amount of the payment is dependent upon the performance of the underlying covered loans, recoveries, the passage of time and actual claims submitted to theFDIC . Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation. Land is carried at cost. Depreciation expense is generally computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements and capitalized leases are amortized on a straight-line basis over the lesser of the lease terms or the estimated useful lives of the assets. 73
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Goodwill and Other Intangible AssetsGoodwill represents the excess of the purchase price of an acquired entity over the fair value of the identifiable assets acquired.Goodwill is not amortized, but is evaluated at least annually for impairment during the third quarter, or when events or changes in circumstances indicate a potential impairment exists. Other acquired intangible assets with finite lives, such as core deposit intangibles, are initially recorded at fair value and are amortized on an accelerated basis typically between five to twelve years over their estimated useful lives. Intangible assets are evaluated for impairment when events or changes in circumstances indicate a potential impairment exists. Mortgage Servicing Rights Mortgage servicing rights ("MSRs") represent the right to provide servicing under various loan servicing contracts is either retained in connection with a loan sale or acquired in a business combination. MSRs are initially recorded at fair value and amortized in proportion to, and over the period of, the future net servicing income of the underlying loan. At each reporting period, MSRs are evaluated for impairment based upon the fair value of the rights as compared to the carrying value. Fair Values The fair value of financial instruments and the methods and assumptions used in estimating fair value amounts and financial assets and liabilities for which fair value was elected are detailed in Note P, Estimated Fair Values. Income Taxes Income taxes are accounted for using the asset and liability approach as prescribed in ASC 740, Income Taxes. Under this method, a deferred tax asset or liability is determined based on the currently enacted tax rates applicable to the period in which the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in BancShares' income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period which includes the enactment date. The potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities is continually monitored and evaluated. Income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions where income tax returns are filed, as well as potential or pending audits or assessments by such tax auditors are evaluated on a periodic basis. BancShares has unrecognized tax benefits related to the uncertain portion of tax positions BancShares has taken or expects to take. A liability may be created or an amount refundable may be reduced for the amount of unrecognized tax benefits. These uncertainties result from the application of complex tax laws, rules, regulations and interpretations, primarily in state taxing jurisdictions. Unrecognized tax benefits are assessed quarterly and may be adjusted through current income tax expense in future periods based on changing facts and circumstances, completion of examinations by taxing authorities or expiration of a statute of limitations. Estimated penalties and interest on uncertain tax positions are recognized in income tax expense. BancShares files a consolidated federal income tax return and various combined and separate company state tax returns. See Note O, Income Taxes, for additional disclosures. Per Share Data Earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of both classes of common shares outstanding during each period. BancShares had no potential dilutive common shares outstanding in any period and did not report diluted earnings per common share. Cash dividends per share apply to both Class A and Class B common stock. Shares of Class A common stock carry one vote per share, while shares of Class B common stock carry 16 votes per share. 74
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Defined Benefit Pension Plans BancShares maintains noncontributory defined benefit pension plans covering certain qualifying employees. The calculation of the obligations and related expenses under the plans require the use of actuarial valuation methods and assumptions. Actuarial assumptions used in the determination of future values of plan assets and liabilities are subject to management judgment and may differ significantly if different assumptions are used. All assumptions are reviewed annually for appropriateness. The discount rate assumption used to measure the plan obligations is based on a yield curve developed from high-quality corporate bonds across a full maturity spectrum. The projected cash flows of the pension plans are discounted based on this yield curve, and a single discount rate is calculated to achieve the same present value. The assumed rate of future compensation increases is based on actual experience and future salary expectations. We also estimate a long-term rate of return on pension plan assets used to estimate the future value of plan assets. In developing the long-term rate of return, we consider such factors as the actual return earned on plan assets, historical returns on the various asset classes in the plans and projections of future returns on various asset classes. Refer to Note Q, Employee Benefit Plans, for disclosures related to BancShares' defined benefit pension plans. Leases BancShares leases certain branch locations, administrative offices and equipment. Operating lease ROU assets are included in other assets and the associated lease obligations are included in other liabilities. Finance leases are included in premises and equipment and other borrowings. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets; we instead recognize lease expense for these leases on a straight-line basis over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our corresponding obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The operating and finance lease ROU asset also includes initial direct costs and pre-paid lease payments made, excluding lease incentives. As most of our leases do not provide an implicit rate, BancShares uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate is determined using secured rates for new FHLB advances under similar terms as the lease at inception. We utilize the implicit or incremental borrowing rate at the effective date of a modification not accounted for as a separate contract or a change in the lease terms to determine the present value of lease payments. For operating leases commencing prior toJanuary 1, 2019 , BancShares used the incremental borrowing rate as of that date. Most leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 25 years. The exercise of lease renewal options is at our sole discretion. When it is reasonably certain we will exercise our option to renew or extend the lease term, the option is included in calculating the value of the ROU asset and lease liability. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. We determine if an arrangement is a lease at inception. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We do not lease any properties or facilities from any related party. As ofDecember 31, 2020 , there were no leases that have not yet commenced that would have a material impact on our consolidated financial statements. See Note R, Leases, for additional disclosures. Revenue Recognition BancShares generally acts in a principal capacity, on its own behalf, in its contracts with customers. In these transactions, we recognize revenues and the related costs to generate those revenues on a gross basis. In certain, circumstances, we act in an agent capacity, on behalf of the customers with other entities, and recognize revenues and the related costs to provide our services on a net basis. Business lines where BancShares acts as an agent include cardholder and merchant services, insurance, and brokerage. Descriptions of our noninterest revenue-generating activities are broadly segregated as follows: Cardholder and Merchant Services - These represent interchange fees from customer debit and credit card transactions earned when a cardholder engages in a transaction with a merchant as well as fees charged to merchants for providing them the ability to accept and process the debit and credit card transaction. Revenue is recognized when the performance obligation has been satisfied, which is upon completion of the card transaction. Additionally, as FCB is acting as an agent for the customer and transaction processor, costs associated with cardholder and merchant services transactions are netted against the fee income. 75
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Service charges on deposit accounts - These deposit account-related fees represent monthly account maintenance and transaction-based service fees such as overdraft fees, stop payment fees and charges for issuing cashier's checks and money orders. For account maintenance services, revenue is recognized at the end of the statement period when our performance obligation has been satisfied. All other revenues from transaction-based services are recognized at a point in time when the performance obligation has been completed. Wealth management services - These primarily represent sales commissions on various product offerings, transaction fees and trust and asset management fees. The performance obligation for wealth management services is the provision of services to place annuity products issued by the counterparty to investors and the provision of services to manage the client's assets, including brokerage custodial and other management services. Revenue from wealth management services is recognized over the period in which services are performed, and is based on a percentage of the value of the assets under management/administration. Other service charges and fees - These include, but are not limited to, check cashing fees, international banking fees, internet banking fees, wire transfer fees and safe deposit fees. The performance obligation is fulfilled and revenue is recognized, at the point in time the requested service is provided to the customer. Insurance commissions - These represent commissions earned on the issuance of insurance products and services. The performance obligation is generally satisfied upon the issuance of the insurance policy and revenue is recognized when the commission payment is remitted by the insurance carrier or policy holder depending on whether the billing is performed by BancShares or the carrier. ATM income - These represent fees imposed on customers and non-customers for engaging in an ATM transaction. Revenue is recognized at the time of the transaction as the performance obligation of rendering the ATM service has been met. Other - This consists of several forms of recurring revenue such as FHLB dividends and income earned on changes in the cash surrender value of bank-owned life insurance. Prior to adoption of ASC 326, other income included recoveries on PCI loans previously charged-off. For the remaining immaterial transactions, revenue is recognized when, or as, the performance obligation is satisfied. Refer to Note N, Other Noninterest Income and Other Noninterest Expense, for additional disclosures on other noninterest income. Recently Adopted Accounting PronouncementsFinancial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2018-14 - Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans This ASU modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by eliminating the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year and adding a requirement to disclose an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments in this ASU are effective for public entities for fiscal years ending after December 15, 2020. Early adoption is permitted for all entities. BancShares adopted all applicable amendments during the fourth quarter of 2020. See Note Q. Employee Benefit Plans for changes to disclosure. FASB ASU 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement This ASU modifies the disclosure requirements on fair value measurements by eliminating the requirements to disclose (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy (2) the policy for timing of transfers between levels and (3) the valuation processes for Level 3 fair value measurements. This ASU also added specific disclosure requirements for fair value measurements for public business entities including the requirement to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. BancShares adopted this ASU during the first quarter of 2020 and have made all applicable updates to the disclosure within the Notes to the Consolidated Financial Statements. 76
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FASB ASU 2017-04, Intangibles -Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment This ASU eliminates Step 2 from the goodwill impairment test. Under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative test. BancShares adopted this ASU during the first quarter 2020 with no impact to our consolidated financial position or consolidated results of operations as a result of the adoption. There was no impairment recorded as a result of our annual assessment during the third quarter of 2020. FASB ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments This ASU (and all subsequent ASUs on this topic) introduce the CECL model, a new credit loss methodology, replacing multiple existing impairment methods in current GAAP, which generally require that a loss be incurred before it is recognized. The amendments in this ASU require loss estimates be determined over the lifetime of the asset and broaden the information that an entity must consider in developing its expected credit losses. The ASU does not specify a method for measuring expected credit losses and allows an entity to apply methods that reasonably reflect its expectations of the credit loss estimate based on the entity's size, complexity and risk profile. In addition, the disclosures of credit quality indicators in relation to the amortized cost of financing receivables, a current disclosure requirement, are further disaggregated by year of origination. BancShares adopted this ASU (and all subsequent ASUs on this topic) as of January 1, 2020 using the modified retrospective approach for all loans, leases, debt securities designated as held to maturity, and unfunded loan commitments. BancShares adopted the ASU using the prospective approach for debt securities available for sale and PCD loans previously accounted for under ASC 310-30. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. BancShares made changes to loan classifications and segmentation in order to align with ASC 326 requirements and facilitate CECL modeling. Using this updated segmentation, BancShares developed new loan level models to estimate the ACL and facilitate revised disclosures. Upon adoption, BancShares recorded a net decrease of $37.9 million in the ACL which included a reduction of $56.9 million in the ACL on non-PCD loans, offset by an increase of $19.0 million in the ACL on PCD loans. The $56.9 million reduction in the ACL on non-PCD loans, as well as an $8.9 million increase in the reserve for unfunded commitments, net of deferred taxes, resulted in an increase in retained earnings of $36.9 million. The $19.0 million increase in the ACL on PCD loans was a reclassification of the PCD credit discount and resulted in a gross up of loan balances by this same amount and did not have any effect on retained earnings. Impact to total capital and capital ratios was not significant and we did not elect the capital phase-in option allowable for regulatory reporting purposes. There was no ACL recorded on debt securities held to maturity at adoption. The largest changes in the ACL, affecting beginning retained earnings as a result of the adoption, were decreases in the ACL on commercial loan segments as these portfolios have exhibited strong historical credit performance and have relatively short average lives. The reduction in ACL on these segments was partially offset by increases in ACL on our consumer loan segments primarily due to their longer average lives. The increase in the reserve for unfunded commitments was primarily due to increases in the scope of off-balance sheet exposures considered in this estimate due to the provisions in ASC 326. 77
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) BancShares adopted this ASU using the prospective transition approach for PCD loans previously accounted for under ASC 310-30. In accordance with the standard, we did not assess whether purchased credit impaired ("PCI") loans met the criteria of PCD as of the date of adoption and all loans previously classified as PCI were updated to the PCD classification. Pools utilized for PCI accounting under ASC 310-30 were dissolved upon adoption. Loans from performing PCI pools, not previously considered nonaccrual of $47.0 million, were reclassified into nonaccrual status as a result of adoption. PCD loans were assessed using the loan level probability of default and loss given default models, as well as utilizing prior specific loan reviews to inform the initial PCD loan ACL. The ACL for PCD loans increased as a result of adoption and the amortized cost basis of these loans was adjusted to reflect the transfer of this amount from credit discount to ACL. The remaining noncredit discount will be accreted into interest income at the effective interest rate as of January 1, 2020. At the date of adoption, no securities were determined to be PCD. BancShares also adopted this ASU under the prospective transition approach for debt securities available for sale. No previously recorded other than temporary impairment was reported on the portfolio of debt securities. NOTE B BUSINESS COMBINATIONS Recently Announced Business Combinations CIT Group Inc. On October 15, 2020, BancShares and CIT Group Inc., aDelaware corporation ("CIT"), entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among BancShares, FCB, FC Merger Subsidiary IX, Inc., a direct, wholly owned subsidiary of FCB ("Merger Sub"), and CIT, the parent company ofCIT Bank, N.A ., a national banking association ("CIT Bank"). Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into CIT, with CIT as the surviving entity (the "First-Step Merger"), and as soon as reasonably practicable following the effective time of the First-Step Merger, CIT will merge with and into FCB, with FCB as the surviving entity (together with the First-Step Merger, the "Mergers"). The Merger Agreement further provides that immediately following the consummation of the Mergers, CIT Bank will merge with and into FCB, with FCB as the surviving bank (together with the Mergers, the "Transaction"). The Merger Agreement was unanimously approved by the Board of Directors of each of BancShares and CIT. On February 9, 2021, BancShares and CIT both held a special meeting of shareholders where they received the necessary shareholder approvals for the consummation of the Transaction from their respective shareholders. Subject to the fulfillment of customary closing conditions, the parties anticipate that the Transaction will close in the first half of 2021. Upon the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the First-Step Merger (the "Effective Time"), each share of CIT common stock, par value $0.01 per share, issued and outstanding immediately prior to the Effective Time ("CIT Common Stock"), except for certain shares of CIT Common Stock owned by CIT or BancShares, will be converted into the right to receive .06200 shares of BancShares Class A common stock, par value $1.00 per share. Holders of CIT Common Stock will receive cash in lieu of fractional shares. In addition, at the Effective Time, each share of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, of CIT and 5.625% Non-Cumulative Perpetual Preferred Stock, Series B, par value $0.01 per share, of CIT issued and outstanding will automatically be converted into the right to receive one share of a newly created series of preferred stock, Series B, of BancShares and one share of a newly created series of preferred stock, Series C, of BancShares, respectively. The Merger Agreement requires that, effective as of the Effective Time, the Boards of Directors of the combined company and the combined bank will consist of 14 directors, (i) 11 of whom will be members of the current Board of Directors of BancShares, and (ii) three of whom will be selected from among the current Board of Directors of CIT and will include as one of those three,Ellen R. Alemany , Chairwoman and Chief Executive Officer of CIT. 78
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Completed Business Combinations FCB has evaluated the financial statement significance for all business combinations completed during 2020 and 2019. FCB has concluded the completed business combinations noted below are not material to BancShares' consolidated financial statements, individually or in aggregate, and therefore, pro forma financial data has not been included. Each transaction was accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding closing date fair value becomes available. As part of the accounting for each acquisition, we perform an analysis of the acquired bank's loan portfolio and based on such credit factors as past due status, nonaccrual status, life-to-date charge-offs and other quantitative and qualitative considerations segregate the acquired loans into PCD loans and non-PCD loans. PCD loans are accounted for under ASC 326, and non-PCD loans which do not meet this criteria are accounted for under ASC 310. Additionally, we perform an analysis of the acquired bank's portfolio of debt securities to determine if any debt securities should be designated PCD.Community Financial Holding Company, Inc. On February 1, 2020, FCB completed the merger ofDuluth, Georgia -basedCommunity Financial Holding Company, Inc. ("Community Financial") and its bank subsidiary,Gwinnett Community Bank . Under the terms of the agreement, total cash consideration of $2.3 million was paid to the shareholders of Community Financial. The merger allows FCB to expand its presence and enhance banking efforts inGeorgia . The fair value of the assets acquired was $221.4 million, including $110.6 million in non-PCD loans, $23.4 million in PCD loans, net of an ACL of $1.2 million, and $536 thousand in a core deposit intangible. No debt securities purchased in the transaction were designated PCD. Liabilities assumed were $219.8 million, of which $209.3 million were deposits. As a result of the transaction, FCB recorded $686 thousand of goodwill. The amount of goodwill represents the excess purchase price over the estimated fair value of the net assets acquired. The premium paid reflects the increased market share and related synergies expected to result from the acquisition. None of the goodwill was deductible for income tax purposes as the merger was accounted for as a qualified stock purchase. 79
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides the purchase price as of the acquisition date and
the identifiable assets acquired and liabilities assumed at their estimated fair
values:
(Dollars in thousands) As recorded by FCB
Purchase price $ 2,320
Assets
Cash and due from banks $ 1,085
Overnight investments 35,129
Investment securities 30,146
Loans 133,989
Premises and equipment 7,624
Other real estate owned 9,813
Income earned not collected 558
Intangible assets 536
Other assets 2,520
Total assets acquired 221,400
Liabilities
Deposits 209,340
Borrowings 9,925
Other liabilities 501
Total liabilities assumed $ 219,766
Fair value of net assets acquired 1,634
Goodwill recorded for Community Financial $ 686
The Community Financial transaction resulted in merger-related expenses of $3.5
million for the year ended December 31, 2020. Additionally, loan-related
interest income generated was approximately $5.3 million since the acquisition
date. The ongoing contribution of this transaction to BancShares' financial
statements is not considered material, and therefore pro forma financial data is
not included.
Entegra Financial Corp.
On December 31, 2019, FCB completed the merger of Franklin, North Carolina -based
Entegra Financial Corp. ("Entegra") and its bank subsidiary, Entegra Bank . Fair
values were subject to refinement for up to one year after the closing date of
the acquisition. The measurement period ended on December 30, 2020.
The fair value of the assets acquired was $1.68 billion, including $953.7
million in non-PCI loans, $77.5 million in PCI loans and $4.5 million in a core
deposit intangible. Liabilities assumed were $1.51 billion, of which $1.33
billion were deposits. As a result of the transaction, FCB recorded $52.6
million of goodwill. The amount of goodwill represents the excess purchase price
over the estimated fair value of the net assets acquired. Subsequent to the
merger, management made a measurement period adjustment of $214 thousand related
to an increase in the discount for PCD loans, an increase in the premium on
deposits divested and adjustments to the deferred tax asset for these items.
In order to obtain regulatory approval, FCB entered into an agreement for Select
Bank & Trust Company ("Select Bank") to purchase three North Carolina branches,
located in Highlands , Sylva and Franklin . On April 17, 2020, FCB completed the
divestiture of the branches including loans and leases, premises and equipment
and total deposits with fair values of $110.1 million, $2.1 million and $184.8
million, respectively. The Select Bank purchase price for the divested branches
included an 8% premium for deposits acquired that was applied against goodwill
generated as part of the merger with Entegra Bank .
The Entegra transaction resulted in merger-related expenses of $7.8 million and
$5.4 million or the years ended December 31, 2020 and 2019, respectively.
Additionally, loan-related interest was $40.3 million for the year ended
December 31, 2020, while no loan-related interest income was recorded for the
year ended December 31, 2019.
First South Bancorp, Inc.
On May 1, 2019, FCB completed the merger of Spartanburg, South Carolina -based
First South Bancorp, Inc. ("First South Bancorp") and its bank subsidiary, First
South Bank . Fair values were subject to refinement for up to one year after the
closing date of the acquisition. The measurement period ended on April 30, 2020,
with no material changes to the original calculated fair values.
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The fair value of the assets acquired was $239.2 million, including $162.8 million in non-PCI loans, $16.4 million in PCI loans and $2.3 million in a core deposit intangible. Liabilities assumed were $215.6 million, of which $207.6 million were deposits. As a result of the transaction, FCB recorded $13.9 million of goodwill. The amount of goodwill represents the excess purchase price over the estimated fair value of the net assets acquired. TheFirst South Bancorp transaction resulted in no merger-related expenses for the year ended December 31, 2020 and $4.1 million for the year ended December 31, 2019. Additionally, loan-related interest income was approximately $5.7 million and $6.1 million for the years ended December 31, 2020 and 2019, respectively.Biscayne Bancshares, Inc. On April 2, 2019, FCB completed the merger ofCoconut Grove, Florida -basedBiscayne Bancshares, Inc. ("Biscayne Bancshares") and its bank subsidiary,Biscayne Bank . Fair values were subject to refinement for up to one year after the closing date of the acquisition. The measurement period ended on April 1, 2020, with no material changes to the original calculated fair values. The fair value of the assets acquired was $1.03 billion, including $850.4 million in non-PCI loans, $13.0 million in PCI loans and $4.7 million in a core deposit intangible. Liabilities assumed were $956.8 million, of which $786.5 million were deposits. As a result of the transaction, FCB recorded $46.5 million of goodwill. The amount of goodwill represents the excess purchase price over the estimated fair value of the net assets acquired. TheBiscayne Bancshares transaction resulted in merger-related expenses of $847 thousand and $5.8 million the years ended December 31, 2020 and 2019, respectively. Additionally, loan-related interest income generated approximately $37.8 million and $33.8 million for the years ended December 31, 2020 and 2019, respectively. 81
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE C
INVESTMENTS
The amortized cost and fair value of investment and marketable equity securities
at December 31, 2020 and 2019, were as follows:
December 31, 2020
Gross
unrealized Gross unrealized Allowance for Fair
(Dollars in thousands) Cost gains losses credit losses value
Investment securities available for sale
U.S. Treasury $ 499,832 $ 101 $ - $ - $ 499,933
Government agency 706,241 723 5,573 - 701,391
Residential mortgage-backed securities 4,369,130 70,283 1,310 - 4,438,103
Commercial mortgage-backed securities 745,892 25,645 - - 771,537
Corporate bonds 590,870 14,437 2,028 - 603,279
Total investment securities available for
sale $ 6,911,965 $ 111,189 $ 8,911 $ - $ 7,014,243 Investment in marketable equity securities
84,837 8,654 1,811 91,680
Investment securities held to maturity
Residential mortgage-backed securities 1,877,692 17,689 - - 1,895,381
Commercial mortgage-backed securities 937,034 3,884 56 - 940,862
Other 2,256 - - - 2,256
Total investment securities held to
maturity 2,816,982 21,573 56 - 2,838,499
Total investment securities $ 9,813,784 $ 141,416 $ 10,778 $ - $ 9,944,422
December 31, 2019
Gross
Gross unrealized Fair
Cost unrealized gains losses value
Investment securities available for sale
U.S. Treasury $ 409,397 $ 602 $ - $ 409,999
Government agency 684,085 928 2,241 682,772
Residential mortgage-backed securities 5,269,060 13,417 15,387 5,267,090
Commercial mortgage-backed securities 373,105 6,974 59 380,020
Corporate bonds 198,278 3,420 132 201,566
State, county and municipal 118,227 - - 118,227
Total investment securities available for
sale $ 7,052,152 $ 25,341 $ 17,819 $ 7,059,674 Investment in marketable equity securities
59,262 23,304 233 82,333
Investment securities held to maturity
Other 30,996 - - 30,996 Total investment securities $ 7,142,410 $ 48,645 $ 18,052 $ 7,173,003 On November 1, 2020, mortgage-backed securities with an amortized cost of $1.46 billion were transferred from investment securities available for sale to the held to maturity portfolio. At the time of transfer, the mortgage-backed securities had a fair value of $1.47 billion and a weighted average contractual maturity of 18 years. The unrealized gain on these securities at the date of transfer was $5.9 million, or $4.5 million net of tax, and was reported as a component of AOCI. This unrealized gain is accreted over the remaining expected life of the securities as an adjustment of yield. On November 1, 2019, as part of the adoption of ASU 2019-04, mortgage-backed securities with an amortized cost of $2.08 billion were transferred from investment securities held to maturity to the available for sale portfolio. At the time of the transfer, the securities had a fair value of $2.15 billion. The transfer resulted in a reclassification of unrealized losses of $72.5 million, or $55.8 million net of tax, previously frozen in AOCI as a result of the initial transfer to held to maturity. FCB still has the intent and ability to hold the remainder of the held to maturity portfolio to maturity. Investments in mortgage-backed securities represent securities issued by theGovernment National Mortgage Association , Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. Investments in government agency securities represent securities issued by the SBA. Investments in corporate bonds and marketable equity securities represent positions in securities of other financial institutions. Other held to maturity investments include certificates of deposit with other financial institutions. 82
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2020 and January 1, 2020, no ACL was required for available
for sale and held to maturity debt securities. At December 31, 2020, accrued
interest receivable for available for sale and held to maturity debt securities
were $17.6 million and $5.4 million, respectively, and were excluded from the
estimate of credit losses. During the year ended December 31, 2020, no accrued
interest was deemed uncollectible and written off against interest income.
The following table provides the amortized cost and fair value by contractual
maturity. Expected maturities will differ from contractual maturities on certain
securities because borrowers and issuers may have the right to call or prepay
obligations with or without prepayment penalties. Residential and commercial
mortgage-backed and government agency securities are stated separately as they
are not due at a single maturity date.
December 31, 2020 December 31, 2019
Fair Fair
(Dollars in thousands) Cost value Cost value
Investment securities available for sale
Non-amortizing securities maturing in:
One year or less $ 500,846 $ 500,954 $ 406,325 $ 406,927
One through five years 72,565 73,881 24,496 24,971
Five through 10 years 508,320 519,570 185,209 187,868
Over 10 years 8,971 8,807 109,872 110,026
Government agency 706,241 701,391 684,085 682,772
Residential mortgage-backed securities 4,369,130 4,438,103 5,269,060 5,267,090
Commercial mortgage-backed securities 745,892 771,537 373,105 380,020
Total investment securities available for sale $ 6,911,965 $ 7,014,243 $ 7,052,152 $ 7,059,674
Investment securities held to maturity
Non-amortizing securities maturing in:
One year or less $ 1,507 $ 1,507 $ 30,746 $ 30,746
One through five years 749 749 250 250
Residential mortgage-backed securities 1,877,692 1,895,381 - -
Commercial mortgage-backed securities 937,034 940,862 - -
Total investment securities held to maturity $ 2,816,982 $ 2,838,499 $ 30,996 $ 30,996
For each period presented, realized gains on investment securities available for
sale included the following:
Year ended December 31
(Dollars in thousands) 2020 2019 2018Gross gains on retirement/sales of investment securities available for sale
$ 60,932 $ 8,993 $ 353 Gross losses on sales of investment securities available for sale
(679) (1,878) (2)
Realized gains on investment securities available for sale, net $ 60,253
$ 7,115 $ 351
For each period presented, realized and unrealized gains or losses on marketable equity securities included the following:
Year ended December 31
(Dollars in thousands) 2020 2019 2018
Marketable equity securities gains (losses), net $ 29,395 $ 20,625 $ (7,610)
Less net gains recognized on marketable equity
securities sold 44,550 16,344 1,190
Unrealized (losses) gains recognized on marketable
equity securities held $ (15,155) $ 4,281 $ (8,800)
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides information regarding investment securities with unrealized losses as of December 31, 2020 and 2019:
December 31, 2020
Less than 12 months 12 months or more Total
Fair Unrealized Fair Unrealized Fair Unrealized
(Dollars in thousands) Value Losses Value Losses Value Losses
Investment securities available for sale Government agency $ 268,622 $ 3,197
$ 328,777 $ 2,376 $ 597,399 $ 5,573 Residential mortgage-backed securities 433,816
1,241 23,064 69 456,880 1,310
Corporate bonds 57,715 2,028 - - 57,715 2,028
Total $ 760,153 $ 6,466 $ 351,841 $ 2,445 $ 1,111,994 $ 8,911
December 31, 2019
Less than 12 months 12 months or more Total
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
Investment securities available for sale Government agency $ 347,081 $ 1,827
$ 63,947 $ 414 $ 411,028 $ 2,241 Residential mortgage-backed securities 2,387,293
14,016 264,257 1,371 2,651,550 15,387
Commercial mortgage-backed securities 35,926 59 - - 35,926 59 Corporate bonds 7,714 123 4,749 9 12,463 132 Total $ 2,778,014 $ 16,025 $ 332,953 $ 1,794 $ 3,110,967 $ 17,819 As of December 31, 2020, there were 39 investment securities available for sale with continuous losses for more than 12 months, all of which are government sponsored, enterprise-issued mortgage-backed securities or government agency securities. None of the unrealized losses identified as of December 31, 2020 or December 31, 2019 relate to the issuer's ability to honor redemption obligations. Rather, the unrealized losses relate to changes in interest rates relative to when the investment securities were purchased, and do not indicate credit-related impairment. BancShares considered other factors including changes in credit ratings, delinquencies, and other macroeconomic factors in this determination. As a result, none of the securities were deemed to require an allowance for credit losses. BancShares has the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses. Investment securities having an aggregate carrying value of $4.64 billion at December 31, 2020 and $3.93 billion at December 31, 2019, were pledged as collateral to secure public funds on deposit and certain short-term borrowings, and for other purposes as required by law. BancShares' portfolio of held to maturity debt securities consists of mortgage-backed securities issued by government agencies and government sponsored entities. Given the consistently strong credit rating of theU.S. Treasury and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, no allowance for credit losses has been recorded on these securities. Should there be downgrades to the credit rating of theU.S. Treasury or losses reported on securities issued by government agencies and government sponsored entities, BancShares will reevaluate its determination of zero expected credit losses on held to maturity debt securities. There were no debt securities held to maturity on nonaccrual status as of December 31, 2020. A security is considered past due once it is 30 days contractually past due under the terms of the agreement. There were no securities past due as of December 31, 2020. 84
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE D LOANS AND LEASES BancShares' accounting methods for loans and leases depends whether they are originated or purchased, and if purchased, whether or not the loans reflect more than insignificant credit deterioration since origination, which is determined as of the acquisition date. Non-PCD loans consist of loans originated by BancShares and loans purchased from other institutions that do not reflect more than insignificant credit deterioration at acquisition and are reported by loan segments as defined in Note A, Accounting Policies and Basis of Presentation. Purchased loans which reflect more than insignificant credit deterioration are classified as PCD and reported as a single loan segment or class. At the date of acquisition, all acquired loans are recorded at fair value. Loans and leases outstanding include the following at December 31, 2020 and 2019: (Dollars in thousands) December 31, 2020
Commercial:
Construction and land development $ 985,424 Owner occupied commercial mortgage
11,165,012
Non-owner occupied commercial mortgage 2,987,689
Commercial and industrial and leases 5,013,644
SBA-PPP 2,406,291
Total commercial loans 22,558,060
Consumer:
Residential mortgage 5,561,686
Revolving mortgage 2,052,854
Construction and land development 348,123
Consumer auto 1,255,402
Consumer other 552,968
Total consumer loans 9,771,033
Total non-PCD loans and leases 32,329,093
PCD loans 462,882
Total loans and leases $ 32,791,975
(Dollars in thousands) December 31, 2019
Commercial:
Construction and land development $ 1,013,454
Commercial mortgage 12,282,635
Other commercial real estate 542,028
Commercial and industrial and leases 4,403,792
Other 310,093
Total commercial loans 18,552,002
Noncommercial:
Residential mortgage 5,293,917
Revolving mortgage 2,339,072
Construction and land development 357,385
Consumer 1,780,404
Total noncommercial loans 9,770,778
Total non-PCI loans and leases 28,322,780
PCI loans 558,716
Total loans and leases $ 28,881,496
Certain residential real estate loans are originated to be sold to investors and
are recorded in loans held for sale at fair value. Loans held for sale totaled
$124.8 million and $67.9 million at December 31, 2020 and 2019, respectively. We
may change our strategy for certain portfolio loans and sell them in the
secondary market. At such time, portfolio loans are transferred to loans held
for sale at fair value.
During 2020, total proceeds from sales of residential mortgage loans were $1.05
billion, the majority of which were originated to be sold. An additional $7.6
million related to sales of portfolio loans, which were sold at par. During
2019, total proceeds from sales of residential mortgage loans were $756.0
million, of which $731.8 million related to sales of loans held for sale. The
remaining $24.2 million related to sales of portfolio loans, which resulted in a
gain of $0.3 million.
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net deferred fees on originated non-PCD loans and leases, including unearned
income as well as unamortized costs, were $50.2 million and $0.9 million at
December 31, 2020 and 2019, respectively. Of the amount outstanding as of
December 31, 2020, $41.1 million relates to net deferred fees and costs on
SBA-PPP loans. The unamortized discounts related to purchased non-PCD loans was
$19.5 million at December 31, 2020 and $30.9 million at December 31, 2019. The
net unamortized discount related to PCD loans and leases was $45.3 million at
December 31, 2020 and $88.2 million at December 31, 2019.
Loans and leases to borrowers in medical, dental or related fields were $5.54
billion as of December 31, 2020, which represented 16.9% of total loans and
leases, compared to $5.16 billion or 17.9% of total loans and leases at
December 31, 2019. The credit risk of this industry concentration is mitigated
through our underwriting policies, which emphasize reliance on adequate borrower
cash flow, rather than underlying collateral value, and our preference for
financing secured by owner-occupied real property. Except for this single
concentration, no other industry represented more than 10% of total loans and
leases outstanding at December 31, 2020.
The aging of the outstanding loans and leases, by class, at December 31, 2020
and December 31, 2019 is provided in the tables below. Loans and leases 30 days
or less past due are considered current, as various grace periods allow
borrowers to make payments within a stated period after the due date and still
remain in compliance with the loan agreement.
December 31, 2020
30-59 days 60-89 days 90 days or Total past Total loans
(Dollars in thousands) past due past due greater due Current and leases
Commercial:Construction and land development $ 956 $ 527
$ 1,603 $ 3,086 $ 982,338 $ 985,424 Owner occupied commercial mortgage 8,757
2,232 14,082 25,071 11,139,941 11,165,012
Non-owner occupied commercial mortgage 12,370 - 5,973 18,343 2,969,346
2,987,689
Commercial and industrial and leases 14,532 2,842 3,243 20,617 4,993,027 5,013,644
SBA-PPP - - - - 2,406,291 2,406,291
Total commercial loans 36,615 5,601 24,901 67,117 22,490,943 22,558,060
Consumer:
Residential mortgage 43,218 8,364 31,690 83,272 5,478,414 5,561,686
Revolving mortgage 11,977 2,626 7,415 22,018 2,030,836 2,052,854
Construction and land development 932 77 330 1,339 346,784 348,123
Consumer auto 6,825 1,835 1,076 9,736 1,245,666 1,255,402
Consumer other 3,610 1,464 1,505 6,579 546,389 552,968
Total consumer loans 66,562 14,366 42,016 122,944 9,648,089 9,771,033
PCD loans 18,322 6,076 31,026 55,424 407,458 462,882
Total loans and leases $ 121,499 $ 26,043 $ 97,943 $ 245,485 $ 32,546,490 $ 32,791,975
December 31, 2019
30-59 days 60-89 days 90 days or Total past Total loans
(Dollars in thousands) past due past due greater due Current and leases
Commercial:Construction and land development $ 3,146 $ 195
$ 2,702 $ 6,043 $ 1,007,411 $ 1,013,454
Commercial mortgage 20,389 8,774 8,319 37,482 12,245,153 12,282,635
Other commercial real estate 861 331 698 1,890 540,138 542,028
Commercial and industrial and leases 18,269 4,842 5,032 28,143 4,375,649 4,403,792
Other 51 411 126 588 309,505 310,093
Total commercial loans 42,716 14,553 16,877 74,146 18,477,856 18,552,002
Noncommercial:
Residential mortgage 45,839 18,289 24,409 88,537 5,205,380 5,293,917
Revolving mortgage 9,729 3,468 9,865 23,062 2,316,010 2,339,072
Construction and land development 977 218 1,797 2,992 354,393 357,385
Consumer 10,481 3,746 3,571 17,798 1,762,606 1,780,404
Total noncommercial loans 67,026 25,721 39,642 132,389 9,638,389 9,770,778
PCI loans 26,478 10,784 28,973 66,235 492,481 558,716
Total loans and leases $ 136,220 $ 51,058 $ 85,492 $ 272,770 $ 28,608,726 $ 28,881,496
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amortized cost, by class, of loans and leases on nonaccrual status, and loans and leases greater than 90 days past due and still accruing at December 31, 2020 and December 31, 2019, were as follows:
January 1,
2020(1) December 31, 2020
Loans and
Nonaccrual Nonaccrual leases > 90
loans and loans and days and
(Dollars in thousands) leases leases accruing
Commercial:
Construction and land development $ 4,281 $ 1,661 $ -
Owner occupied commercial mortgage 24,476 23,103 3,625
Non-owner occupied commercial mortgage 5,965 7,932 147
Commercial and industrial and leases 7,685 10,626 540
Total commercial loans 42,407 43,322 4,312
Consumer:
Residential mortgage 44,357 66,345 -
Revolving mortgage 22,411 22,236 -
Construction and land development 2,828 652 -
Consumer auto 2,145 3,166 -
Consumer other 798 823 1,195
Total consumer loans 72,539 93,222 1,195
PCD loans 53,771 54,939 355
Total loans and leases $ 168,717 $ 191,483 $ 5,862
(1)Upon the adoption of ASC 326, BancShares eliminated the pooling of PCI loans and as a result $47.0 million in
additional PCD loans were recognized as nonaccrual loans at January 1, 2020. As of December 31, 2020, $24.9
million of these loans remained outstanding.
December 31, 2019
Nonaccrual Loans and
loans and leases > 90 days
(Dollars in thousands) leases and accruing
Commercial:
Construction and land development $ 4,281 $ -
Commercial mortgage 29,733 -
Commercial and industrial and leases 7,365 1,094
Other commercial real estate 708 -
Other 320 -
Total commercial loans 42,407 1,094
Consumer:
Construction and land development 2,828 -
Residential mortgage 44,357 45
Revolving mortgage 22,411 -
Consumer 2,943 2,152
Total noncommercial loans 72,539 2,197
Total non-PCI loans and leases $ 114,946 $ 3,291
Credit quality indicators
Loans and leases are monitored for credit quality on a recurring basis.
Commercial and noncommercial loans and leases have different credit quality
indicators as a result of the unique characteristics of the loan segments being
evaluated. The credit quality indicators for non-PCD commercial loans and leases
are developed through a review of individual borrowers on an ongoing basis.
Commercial loans are evaluated periodically with more frequent evaluations done
on criticized loans. The indicators as of the date presented are based on the
most recent assessment performed and are defined below:
Pass - A pass rated asset is not adversely classified because it does not
display any of the characteristics for adverse classification.
Special mention - A special mention asset has potential weaknesses which deserve
management's close attention. If left uncorrected, such potential weaknesses may
result in deterioration of the repayment prospects or collateral position at
some future date. Special mention assets are not adversely classified and do not
warrant adverse classification.
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Substandard - A substandard asset is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected. Doubtful - An asset classified as doubtful has all the weaknesses inherent in an asset classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions and values. Loss - Assets classified as loss are considered uncollectible and of such little value it is inappropriate to be carried as an asset. This classification is not necessarily equivalent to any potential for recovery or salvage value, but rather it is not appropriate to defer a full charge-off even though partial recovery may be affected in the future. Ungraded - Ungraded loans represent loans not included in the individual credit grading process due to their relatively small balances or borrower type. The majority of ungraded loans at December 31, 2020 and 2019, relate to business credit cards. Business credit card loans are subject to automatic charge-off when they become 120 days past due in the same manner as unsecured consumer lines of credit. The remaining balance is comprised of a small amount of commercial mortgage, lease financing and other commercial real estate loans. The credit quality indicators for consumer and PCD loans are based on delinquency status of the borrower as of the date presented. As the borrower becomes more delinquent, the likelihood of loss increases. The following tables represent current credit quality indicators by origination year as of December 31, 2020.
Commercial Loans Amortized Cost Basis by Origination Year
Revolving
converted to
Classification: 2020 2019 2018 2017 2016 Prior Revolving term loans Total
(Dollars in thousands)
Construction and land development
Pass $ 342,183 $ 341,233 $ 190,429 $ 50,776 $ 23,969 $ 11,306 $ 10,969 $ - $ 970,865
Special Mention 246 - 6,421 5,342 - - 153 - 12,162
Substandard 229 629 1,450 - 8 81 - - 2,397
Total 342,658 341,862 198,300 56,118 23,977 11,387 11,122 - 985,424
Owner occupied commercial mortgage
Pass 3,183,467 2,201,165 1,625,141 1,301,412 1,049,858 1,454,020 101,556 133 10,916,752
Special Mention 6,274 20,702 36,739 12,387 17,699 25,693 5,115 72 124,681
Substandard 10,280 19,052 9,842 20,928 13,736 41,303 8,438 - 123,579
Total 3,200,021 2,240,919 1,671,722 1,334,727 1,081,293 1,521,016 115,109 205 11,165,012
Non-owner occupied commercial mortgage
Pass 865,514 609,975 378,136 331,800 282,810 391,517 32,149 - 2,891,901
Special Mention 569 905 10,794 1,808 5,121 3,279 483 - 22,959
Substandard 2,899 18,546 12,296 8,764 14,087 15,427 810 - 72,829
Total 868,982 629,426 401,226 342,372 302,018 410,223 33,442 - 2,987,689
Commercial and industrial and leases
Pass 1,620,622 983,852 504,463 310,468 234,735 286,996 899,978 5,520 4,846,634
Special Mention 3,146 17,065 7,265 5,393 3,307 4,912 9,152 189 50,429
Substandard 17,811 4,095 4,370 4,257 2,548 3,801 22,384 983 60,249
Ungraded - - - - - - 56,332 - 56,332
Total 1,641,579 1,005,012 516,098 320,118 240,590 295,709 987,846 6,692 5,013,644
SBA-PPP
Pass 2,406,291 - - - - - - - 2,406,291
Total commercial $ 8,459,531 $ 4,217,219 $ 2,787,346 $ 2,053,335 $ 1,647,878 $ 2,238,335 $ 1,147,519 $ 6,897 $ 22,558,060
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Consumer and PCD
Loans Amortized Cost Basis by Origination Year
Revolving
converted to
Days Past Due: 2020 2019 2018 2017 2016 Prior Revolving term loans Total
(Dollars in thousands)
Residential mortgage
Current $ 1,882,683 $ 978,298 $ 655,798 $ 596,309 $ 461,719 $ 878,634 $ 24,973 $ - $ 5,478,414
30-59 days 2,278 4,573 11,463 3,772 8,613 12,299 220 - 43,218
60-89 days 30 100 1,246 1,449 834 4,705 - - 8,364
90 days or greater 282 4,831 3,150 4,015 5,689 13,723 - - 31,690
Total 1,885,273 987,802 671,657 605,545 476,855 909,361 25,193 - 5,561,686
Revolving mortgage
Current - - - - - - 1,879,968 150,868 2,030,836
30-59 days - - - - - - 8,241 3,736 11,977
60-89 days - - - - - - 527 2,099 2,626
90 days or greater - - - - - - 2,301 5,114 7,415
Total - - - - - - 1,891,037 161,817 2,052,854
Construction and land development
Current 215,112 85,707 24,860 10,269 6,093 2,218 2,525 - 346,784
30-59 days - 420 121 370 - 21 - - 932
60-89 days - - - 9 - 68 - - 77
90 days or greater - - - - - 330 - - 330
Total 215,112 86,127 24,981 10,648 6,093 2,637 2,525 - 348,123
Consumer auto
Current 521,719 340,594 219,597 104,280 49,872 9,604 - - 1,245,666
30-59 days 2,175 1,873 1,257 842 544 134 - - 6,825
60-89 days 329 689 312 351 109 45 - - 1,835
90 days or greater 170 527 217 57 102 3 - - 1,076
Total 524,393 343,683 221,383 105,530 50,627 9,786 - - 1,255,402
Consumer other
Current 53,842 27,117 10,911 7,159 2,980 29,336 415,044 - 546,389
30-59 days 322 114 77 18 11 7 3,061 - 3,610
60-89 days 102 20 13 18 3 23 1,285 - 1,464
90 days or greater 53 84 8 - - - 1,360 - 1,505
Total 54,319 27,335 11,009 7,195 2,994 29,366 420,750 - 552,968
Total consumer 2,679,097 1,444,947 929,030 728,918 536,569 951,150 2,339,505 161,817 9,771,033
PCD loans
Current 31,475 25,425 27,183 27,955 28,995 232,186 13,212 21,027 407,458
30-59 days 999 925 801 718 1,341 12,637 156 745 18,322
60-89 days 447 81 312 695 97 4,098 9 337 6,076
90 days or greater 721 2,325 4,755 1,208 897 19,963 111 1,046 31,026
Total PCD 33,642 28,756 33,051 30,576 31,330 268,884 13,488 23,155 462,882
Total loans and leases $ 11,172,270 $ 5,690,922 $ 3,749,427 $ 2,812,829 $ 2,215,777 $ 3,458,369 $ 3,500,512 $ 191,869 $ 32,791,975
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Loans and leases outstanding at December 31, 2019 by credit quality indicator
are provided below:
December 31, 2019
Commercial loans and leases
Commercial and
Construction and land Commercial Other commercial real industrial and Total commercial
(Dollars in thousands) development mortgage estate leases Other PCI loans and leases
Grade:
Pass $ 1,004,922 $ 12,050,799 $ 536,682 $ 4,256,456 $ 308,796 $ 148,412 $ 18,306,067
Special mention 2,577 115,164 3,899 44,604 622 44,290 211,156
Substandard 5,955 116,672 1,447 34,148 675 87,970 246,867
Doubtful - - - 3 - 3,657 3,660
Ungraded - - - 68,581 - - 68,581
Total $ 1,013,454 $ 12,282,635 $ 542,028 $ 4,403,792 $ 310,093 $ 284,329 $ 18,836,331
December 31, 2019
Noncommercial loans and leases
Total
Residential Revolving Construction and noncommercial
(Dollars in thousands) mortgage mortgage land development Consumer PCI loans and leases
Days past due:
Current $ 5,205,380 $ 2,316,010 $ 354,393 $ 1,762,606 $ 240,995 $ 9,879,384
30-59 days past due 45,839 9,729 977 10,481 13,764 80,790
60-89 days past due 18,289 3,468 218 3,746 5,608 31,329
90 days or greater past due 24,409 9,865 1,797 3,571 14,020 53,662
Total $ 5,293,917 $ 2,339,072 $ 357,385 $ 1,780,404 $ 274,387 $ 10,045,165
The following table provides information regarding loans pledged as collateral
for borrowing capacity through the FHLB of Atlanta and the Federal Reserve Bank
("FRB") as of December 31, 2020 and 2019:
December 31,
(Dollars in thousands) December 31, 2020 2019
FHLB of Atlanta
Lendable collateral value of pledged non-PCD loans $ 8,637,844 $ 6,574,636
Less: advances 652,675 563,690
Available borrowing capacity $ 7,985,169 $ 6,010,946
Pledged non-PCD loans $ 12,157,153 $ 9,407,688
FRB
Lendable collateral value of pledged non-PCD loans $ 3,321,762 $ 2,981,712 Less: advances - - Available borrowing capacity $ 3,321,762 $ 2,981,712 Pledged non-PCD loans $
4,104,866 $ 3,684,919
Purchased loans and leases
The following table summarizes PCD loans acquired in the Community Financial
transaction and provides the contractually required payments, less the initial
allowance for credit losses and discount to produce the fair value of acquired
loans with evidence of more than insignificant credit quality deterioration
since origination at the acquisition date:
(Dollars in thousands) Community Financial
Contractually required payments $ 25,635
Initial PCD allowance 1,193
Discount 1,055
Fair value at acquisition date $ 23,387
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The recorded fair values of purchased non-PCD loans acquired in the Community Financial transaction as of the acquisition date are as follows:
(Dollars in thousands) Community Financial
Commercial:
Construction and land development $ 9,428
Owner occupied commercial mortgage 31,473
Non-owner occupied commercial mortgage 25,143
Commercial and industrial and leases 15,065
Total commercial loans 81,109
Consumer:
Residential mortgage 21,168
Revolving mortgage 2,084
Construction and land development 5,254
Consumer auto 294
Consumer other 693
Total consumer loans 29,493
Total non-PCD loans $ 110,602
NOTE E
ALLOWANCE FOR CREDIT LOSSES
As noted in Note A, Accounting Polices and Basis of Presentation, BancShares
determined SBA-PPP loans have zero expected credit losses and as such these are
excluded from ACL disclosures included in the following tables.
Upon adoption of ASC 326, BancShares recorded a net decrease of $37.9 million in
the ACL which included a decrease of $56.9 million in the ACL on non-PCD loans,
offset by an increase of $19.0 million in the ACL on PCD loans. The largest
changes as a result of adoption were decreases in the ACL on commercial loan
segments as these portfolios have exhibited strong historical credit performance
and have relatively short average lives. The reduction in ACL on these segments
was partially offset by increases in ACL on our consumer loan segments primarily
due to their longer average lives. The increase in the ACL on PCD loans was
primarily the result of reallocating credit discount from loan balances into
ACL.
The ACL is calculated using a variety of factors, including, but not limited to,
charge-off and recovery activity, loan growth, changes in macroeconomic factors,
collateral type, estimated loan life and changes in credit quality. For the
period ended December 31, 2020 the primary reason for the ACL change since the
adoption of ASC 326, was a $36.1 million reserve build due to the potential
economic impact of COVID-19 and its estimated impact on credit losses.
Forecasted economic conditions are developed using third party macroeconomic
scenarios adjusted based on management's expectations over a forecast period of
two years. Assumptions revert to long term historic averages over a one year
period. Significant macroeconomic factors used in estimating the expected losses
include unemployment, gross domestic product, home price index and commercial
real estate index. Our model results consider baseline, adverse and upside
scenarios. To calculate the ACL, we utilized the baseline scenario, which
considers government stimulus and incorporates significant improvements to the
most significant forecast assumptions when compared on the COVID-19-impacted
levels from early in 2020. This result was calibrated using management's
expectation of borrower performance based upon COVID-19 residual risk by
industry. These loss estimates were also influenced by BancShares strong credit
quality, low net charge-offs and recent credit trends, which remained stable
through the latter half of year ended December 31, 2020, despite potential
impacts from COVID-19.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Activity in the allowance for credit losses by class of loans is summarized as
follows:
Year ended December 31, 2020
Non-owner
Construction and Owner occupied occupied Commercial and Construction and land
land development commercial commercial industrial and Residential Revolving development - Consumer Consumer
(Dollars in thousands) - commercial mortgage mortgage leases mortgage mortgage consumer auto other PCD Total
Allowance for credit losses:
Balance at December 31, 2019 $ 33,213 $ 36,444 $ 11,102 $ 61,610 $ 18,232 $ 19,702 $ 2,709 $ 4,292 $ 30,301 $ 7,536 $ 225,141
Adoption of ASC 326 (31,061) (19,316) 460 (37,637) 17,118 3,665 (1,291) 1,100 10,037 19,001 (37,924)
Balance at January 1, 2020 2,152 17,128 11,562 23,973 35,350 23,367 1,418 5,392 40,338 26,537 187,217
Provision (credits) 4,301 6,729 12,917 13,816 9,684 1,134 266 6,297 10,410 (7,202) 58,352
Initial allowance on PCD loans - - - - - - - - - 1,193 1,193
Charge-offs (138) (593) (1,951) (14,904) (1,653) (1,662) (70) (3,646) (17,188) (3,300) (45,105)
Recoveries 431 401 124 4,894 717 1,918 117 1,417 5,879 6,759 22,657
Balance at December 31, 2020 $ 6,746 $ 23,665 $ 22,652 $ 27,779 $ 44,098 $ 24,757 $ 1,731 $ 9,460 $ 39,439 $ 23,987 $ 224,314
Years ended December 31, 2019 and 2018
Construction
Construction Commercial and land
and land Other and development
development Commercial commercial industrial and Residential
Revolving - non-
(Dollars in thousands) - commercial mortgage real estate leases Other mortgage mortgage commercial Consumer PCI Total
Allowance for credit losses:
Balance at January 1, 2018 $ 24,470 $ 45,005 $ 4,571 $ 59,824 $ 4,689 $ 15,706
$ 22,436 $ 3,962 $ 31,204 $ 10,026 $ 221,893 Provision (credits)
10,533 (1,490) (2,171) 2,511 (2,827) 897 1,112 (1,520) 22,187 (765) 28,467
Charge-offs (44) (1,140) (69) (10,211) (130) (1,689) (3,235) (219) (22,817) (117) (39,671)
Recoveries 311 1,076 150 3,496 489 558 1,549 127 5,267 - 13,023
Balance at December 31, 2018 35,270 43,451 2,481 55,620 2,221 15,472 21,862 2,350 35,841 9,144 223,712
Provision (credits) (2,171) 2,384 (285) 14,212 (754) 3,481 (788) 359 16,611 (1,608) 31,441
Charge-offs (196) (1,096) - (13,352) (100) (1,137) (2,584) - (24,562) - (43,027)
Recoveries 310 596 15 2,894 869 416 1,212 - 6,703 - 13,015Balance at December 31, 2019 $ 33,213 $ 45,335
$ 2,211 $ 59,374 $ 2,236 $ 18,232 $ 19,702 $ 2,709 $ 34,593 $ 7,536 $ 225,141
BancShares records an allowance for credit losses on unfunded commitments within
other liabilities. Activity in the allowance for credit losses for unfunded
commitments is summarized as follows:
(Dollars in thousands) Year ended December 31, 2020
Allowance for credit losses:
Balance at December 31, 2019 $ 1,055
Adoption of ASC 326 8,885
Balance at January 1, 2020 $ 9,940
Provision 2,874
Balance at December 31, 2020 12,814
BancShares individually reviews loans greater than $500 thousand that are
determined to be collateral-dependent. These collateral-dependent loans are
evaluated based on the fair value of the underlying collateral as repayment of
the loan is expected to be made through the operation or sale of the collateral.
Commercial and industrial loans and leases are collateralized by business
assets, while the remaining loan classes are collateralized by real property.
The following table presents information on collateral-dependent loans by class
and includes the amortized cost of collateral-dependent loans and leases, the
net realizable value of the collateral, the extent to which collateral secures
collateral-dependent loans and the associated ACL as of December 31, 2020 were
as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net Realizable
Value of Allowance for
(Dollars in thousands) Collateral-Dependant Loans Collateral Collateral Coverage Credit Losses
Commercial loans:
Construction and land development $ 1,424 $ 1,795 126.1 % $ -
Owner occupied commercial mortgage 9,792 14,253 145.6
-
Non-owner occupied commercial mortgage 5,556 7,577 136.4 - Total commercial loans 16,772 23,625 140.9 - Consumer: Residential mortgage 23,011 29,775 129.4 131 Total non-PCD loans 39,783 53,400 134.2 131 PCD 19,042 27,872 146.4 - Total collateral-dependent loans $ 58,825 $ 81,272 138.2 % $
131
Collateral-dependent nonaccrual loans with no recorded allowance totaled $57.5
million as of December 31, 2020. All other nonaccrual loans have a recorded
allowance.
Allowance for Loan and Lease Losses
Prior to adoption of ASC 326, management calculated estimated loan losses
through the allowance for loan and lease losses ("ALLL"). The ALLL represented
management's best estimate of inherent credit losses within the loan and lease
portfolio at the balance sheet date. Management determined the ALLL based on an
ongoing evaluation of the loan portfolio. Estimates for loan losses were
determined by analyzing quantitative and qualitative components, such as:
economic conditions, historical loan losses, historical loan migration to
charge-off experience, current trends in delinquencies and charge-offs, expected
cash flows on PCI loans, current assessment of impaired loans, and changes in
the size, composition and/or risk within the loan portfolio. Adjustments to the
ALLL were recorded with a corresponding entry to provision for loan and lease
losses. Loan balances considered uncollectible were charged-off against the
ALLL. Recoveries of amounts previously charged-off were generally credited to
the ALLL.
A primary component of determining the allowance on non-PCI loans collectively
evaluated was the actual loss history of the various loan classes. Loan loss
factors were based on historical experience and, when necessary, were adjusted
for significant factors, that in management's judgment, affect the
collectability of principal and interest at the balance sheet date. Loan loss
factors were monitored quarterly and, when necessary, adjusted based on changes
in the level of historical net charge-offs and updates by management, such as
the number of periods included in the calculation of loss factors, loss
severity, loss emergence period and portfolio attrition.
For commercial non-PCI loans, management incorporated historical net loss data
to develop the applicable loan loss factors. General reserves for collective
impairment were based on incurred loss estimates for the loan class based on
average loss rates by credit quality indicators, which were estimated using
historical loss experience and credit risk rating migrations. Credit quality
indicators include borrower classification codes and facility risk ratings.
Incurred loss estimates were adjusted through a qualitative assessment to
reflect current economic conditions and portfolio trends including credit
quality, concentrations, aging of the portfolio and significant policy and
underwriting changes.
For noncommercial non-PCI loans, management incorporated specific loan class and
delinquency status trends into the loan loss factors. General reserve estimates
of incurred losses were based on historical loss experience and the migration of
loans through the various delinquency pools applied to the current risk mix.
Non-PCI loans were considered to be impaired when, based on current information
and events, it was probable that a borrower would be unable to pay all amounts
due according to the contractual terms of the loan agreement. Generally,
management considered the following loans to be impaired: all TDR loans and all
loan relationships which were on nonaccrual or 90+ days past due and greater
than $500,000. Non-PCI impaired loans greater than $500,000 were evaluated
individually for impairment while others were evaluated collectively.
The impairment assessment and determination of the related specific reserve for
each impaired loan was based on the loan's characteristics. Impairment
measurement for loans dependent on borrower cash flow for repayment was based on
the present value of expected cash flows discounted at the interest rate
implicit in the original loan agreement. Impairment measurement for most real
estate loans, particularly when a loan was considered to be a probable
foreclosure, was based on the fair value of the underlying collateral.
Collateral was appraised and market value (appropriately adjusted for an
assessment of the sales and marketing costs) was used to calculate a fair value
estimate. A specific valuation allowance was established or partial charge-off
was recorded for the difference between the excess recorded investment in the
loan and the loan's estimated fair value less costs to sell.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The ALLL for PCI loans was estimated based on the expected cash flows over the
life of the loan. BancShares estimated and updated cash flows expected to be
collected on individual loans or pools of loans sharing common risk
characteristics. BancShares compared the carrying value of all PCI loans to the
present value at each balance sheet date. If the present value was less than the
carrying value, the shortfall reduced the remaining credit discount and if it
was in excess of the remaining credit discount, an ALLL was recorded through the
recognition of provision expense. The ALLL for PCI loans with subsequent
increases in expected cash flows to be collected was reduced and any remaining
excess was recorded as an adjustment to the accretable yield over the loan's or
pool's remaining life.
The following tables present the allowance and recorded investment in loans and
leases by class of loans, as well as the associated impairment method at
December 31, 2019.
December 31, 2019
Construction Construction
and land Other Commercial and land
development Commercial commercial and industrial and Residential Revolving development
(Dollars in thousands) - commercial mortgage real estate leases Other mortgage mortgage - non-commercial Consumer Total
Non-PCI Loans
Allowance for loan and lease
losses:
ALLL for loans and leases
individually evaluated for
impairment $ 463 $ 3,650 $ 39 $ 1,379 $ 103 $ 3,278 $ 2,722 $ 174 $ 1,107 $ 12,915
ALLL for loans and leases
collectively evaluated for
impairment 32,750 41,685 2,172 57,995 2,133 14,954 16,980 2,535 33,486 204,690
Total allowance for loan and
lease losses $ 33,213 $ 45,335 $ 2,211 $ 59,374 $ 2,236 $ 18,232 $ 19,702 $ 2,709 $ 34,593 $ 217,605
Loans and leases:
Loans and leases individually
evaluated for impairment $ 4,655 $ 70,149 $ 1,268 $ 12,182 $ 639 $ 60,442 $ 28,869 $ 3,882 $ 3,513 $ 185,599
Loans and leases collectively
evaluated for impairment 1,008,799 12,212,486 540,760 4,391,610 309,454 5,233,475 2,310,203 353,503 1,776,891 28,137,181
Total loan and leases $ 1,013,454 $ 12,282,635 $ 542,028 $ 4,403,792 $ 310,093 $ 5,293,917 $ 2,339,072 $ 357,385 $ 1,780,404 $ 28,322,780
The following table presents the PCI allowance and recorded investment in loans at December 31, 2019.
(Dollars in thousands)
December 31, 2019
Allowance for loan losses: ALLL for loans acquired with deteriorated credit quality $ 7,536 Loans acquired with deteriorated credit quality 558,716
At December 31, 2019, $139.4 million, respectively, in PCI loans experienced an adverse change in expected cash flows since the date of acquisition. The corresponding valuation reserve was $7.5 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present the recorded investment and related allowance in
non-PCI impaired loans and leases by class of loans, as well as the unpaid
principle balance.
December 31, 2019
With a With no Unpaid Related
recorded recorded principal allowance
(Dollars in thousands) allowance allowance Total balance recorded
Non-PCI impaired loans and leases
Commercial:
Construction and land development $ 1,851 $ 2,804 $ 4,655 $ 5,109 $ 463
Commercial mortgage 42,394 27,755 70,149 74,804 3,650
Other commercial real estate 318 950 1,268 1,360 39
Commercial and industrial and leases 7,547 4,635 12,182 13,993 1,379
Other 406 233 639 661 103
Total commercial loans 52,516 36,377 88,893 95,927 5,634
Noncommercial:
Residential mortgage 48,796 11,646 60,442 64,741 3,278 Revolving mortgage 26,104 2,765 28,869 31,960 2,722 Construction and land development 2,470 1,412 3,882 4,150 174 Consumer 3,472 41 3,513 3,821 1,107 Total noncommercial loans 80,842 15,864 96,706 104,672 7,281 Total non-PCI impaired loans and leases $ 133,358 $ 52,241
$ 185,599 $ 200,599 $ 12,915
Non-PCI impaired loans less than $500,000 that were collectively evaluated was
$41.0 million at December 31, 2019.
The following tables show the average non-PCI impaired loan balance and the
interest income recognized by loan class for the years ended December 31, 2019
and 2018:
2019 2018
Average Interest Income Average Interest Income
(Dollars in thousands) Balance Recognized Balance Recognized
Non-PCI impaired loans and leases:
Commercial:
Construction and land development $ 3,915 $ 53 $ 1,734 $ 84 Commercial mortgage
64,363 2,188 65,943 2,569
Other commercial real estate 919 27 1,225 43
Commercial and industrial and leases 11,884 482 9,560 364
Other 396 11 135 3
Total commercial 81,477 2,761 78,597 3,063
Noncommercial:
Residential mortgage 52,045 1,386 41,368 1,237
Revolving mortgage 29,516 1,009 26,759 900
Construction and land development 3,589 116 3,677 172
Consumer 3,311 138 2,722 116
Total noncommercial 88,461 2,649 74,526 2,425
Total non-PCI impaired loans and leases $ 169,938 $ 5,410 $ 153,123 $ 5,488
Troubled Debt Restructurings
BancShares accounts for certain loan modifications or restructurings as TDRs. In
general, the modification or restructuring of a loan is considered a TDR if, for
economic or legal reasons related to a borrower's financial difficulties, a
concession is granted to the borrower that creditors would not otherwise
consider. Concessions may relate to the contractual interest rate, maturity
date, payment structure or other actions. Within our allowance for credit loss
models, TDRs are not individually evaluated unless determined to be
collateral-dependent and are included in the definition of default which
provides for a 100% probability of default applied within the models. As a
result, subsequent changes in default status do not impact the calculation of
the allowance for credit losses on TDR loans.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Interagency Statement on Loan Modifications and Reporting for Financial
Institutions Working with Customers Affected by the Coronavirus was published by
banking regulators in April 2020 to clarify expectations around loan
modifications and the determination of TDRs for borrowers experiencing
COVID-19-related financial difficulty. BancShares applied this regulatory
guidance during its TDR identification process for short-term loan forbearance
agreements as a result of COVID-19 and in most cases is not recording these as
TDRs.
The following tables provides a summary of total TDRs by accrual status. Total
TDRs at December 31, 2020 were $208.2 million. Total TDRs at December 31, 2019,
were $171.2 million, of which $154.0 million were non-PCI and $17.2 million were
PCI. Total TDRs at December 31, 2018, were $156.1 million, of which $137.9
million were non-PCI and $18.2 million were PCI.
December 31, 2020
(Dollars in thousands) Accruing Nonaccruing Total
Commercial loans: Construction and land development $ 578 $ 54 $
632
Owner occupied commercial mortgage 37,574 10,889
48,463
Non-owner occupied commercial mortgage 18,336 1,649
19,985
Commercial and industrial and leases 29,131 3,528 32,659
Total commercial loans 85,619 16,120 101,739
Consumer:
Residential mortgage 29,458 19,380 48,838
Revolving mortgage 20,124 7,128 27,252
Construction and land development 1,573 9 1,582
Consumer auto 2,018 696 2,714
Consumer other 955 137 1,092
Total consumer loans 54,128 27,350 81,478
PCD loans 17,617 7,346 24,963
Total loans $ 157,364 $ 50,816 $ 208,180
December 31, 2019 December 31, 2018
(Dollars in thousands) Accruing Nonaccruing Total Accruing Nonaccruing Total
Commercial loans:
Construction and land development $ 487 $ 2,279 $ 2,766 $ 1,946 $ 352 $ 2,298
Commercial mortgage 50,819 11,116 61,935 53,270 7,795 61,065
Other commercial real estate 571 - 571 851 9 860
Commercial and industrial and leases 9,430 2,409 11,839 7,986 2,060 10,046
Other 320 105 425 118 173 291
Total commercial loans 61,627 15,909 77,536 64,171 10,389 74,560
Noncommercial:
Residential mortgage 41,813 16,048 57,861 37,903 9,621 47,524
Revolving mortgage 21,032 7,367 28,399 20,492 8,196 28,688
Construction and land development 1,452 2,430 3,882 2,227 110 2,337
Consumer 2,826 688 3,514 2,300 721 3,021
Total noncommercial loans 67,123 26,533 93,656 62,922 18,648 81,570
Total loans $ 128,750 $ 42,442 $ 171,192 $ 127,093 $ 29,037 $ 156,130
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables provide the types of modifications designated TDRs made
during the years ended December 31, 2020, 2019 and 2018, as well as a summary of
loans that were modified as a TDR during the years ended December 31, 2020, 2019
and 2018 that subsequently defaulted during the years ended December 31, 2020,
2019 and 2018. BancShares defines payment default as movement of the TDR to
nonaccrual status, which is generally 90 days past due, foreclosure or
charge-off, whichever occurs first.
2020 2019 2018
Restructurings with payment Restructurings with payment Restructurings with payment
All restructurings default All restructurings default All restructurings default
Number of Amortized cost Number of Amortized cost Number of Amortized cost Number of Amortized cost Number of Amortized cost Number of Amortized cost
loans at period end loans at period end loans at period end loans at period end loans at period end loans at period end
(Dollars in thousands)
Loans and leases
Interest only period provided
Commercial loans 31 $ 28,145 4 $ 4,498 11 $ 1,595 1 $ 238 3 $ 1,003 - $ -
Consumer loans 6 4,169 5 2,569 7 4,018 2 2,717 - - - -
Total interest only 37 32,314 9 7,067 18 5,613 3 2,955 3 1,003 - -
Loan term extension
Commercial loans 26 5,444 5 1,471 16 3,904 5 533 21 3,933 4 675
Consumer loans 66 5,689 43 3,241 2 342 1 306 21 1,554 4 190
Total loan term
extension 92 11,133 48 4,712 18 4,246 6 839 42 5,487 8 865
Below market interest rate
Commercial loans 98 33,870 26 1,912 90 13,932 24 2,634 85 12,859 24 2,998
Consumer loans 156 6,074 60 3,897 176 12,458 66 4,014 184 15,545 68 5,461
Total below market
interest rate 254 39,944 86 5,809 266 26,390 90 6,648 269 28,404 92 8,459
Discharged from bankruptcy
Commercial loans 30 1,168 17 286 25 5,571 20 5,028 26 2,043 8 825
Consumer loans 186 8,129 66 2,928 178 10,349 71 4,239 151 6,617 56 3,169
Total discharged from
bankruptcy 216 9,297 83 3,214 203 15,920 91 9,267 177 8,660 64 3,994
Total restructurings 599 $ 92,688 226 $ 20,802 505 $ 52,169 190 $ 19,709 491 $ 43,554 164 $ 13,318
For the years ended December 31, 2020, 2019 and 2018, the pre-modification and
post-modification outstanding amortized cost of loans modified as TDRs were not
materially different.
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F
PREMISES AND EQUIPMENT
Major classifications of premises and equipment at December 31, 2020 and 2019
are summarized as follows:
(Dollars in thousands) Useful Life ( years) 2020 2019
Land indefinite $ 336,258 $ 335,093
Premises and leasehold improvements 3 - 40 1,286,092 1,228,588
Furniture, equipment and software 3 - 10 639,109 595,686
Total 2,261,459 2,159,367
Less accumulated depreciation and
amortization 1,010,176 914,971
Total premises and equipment $ 1,251,283 $ 1,244,396
Depreciation and amortization expense was $108.6 million, $103.8 million and $96.8 million for the years ended December 31, 2020, 2019 and 2018, respectively.
NOTE G OTHER REAL ESTATE OWNED
The following table explains changes in other real estate owned ("OREO") for the years ended December 31, 2020 and 2019.
(Dollars in thousands) 2020 2019
Balance at January 1 $ 46,591 $ 48,030
Additions 26,822 21,684
Acquired in business combinations 9,813 5,459
Sales (26,726) (24,432)
Write-downs/losses (5,610) (4,150)
Balance at December 31 50,890 46,591
At December 31, 2020 and 2019, BancShares had $5.8 million and $14.5 million,
respectively, of foreclosed residential real estate property in OREO. The
recorded investment in consumer mortgage loans collateralized by residential
real estate property in the process of foreclosure was $29.4 million and $23.0
million at December 31, 2020, and 2019, respectively. Gains recorded on the sale
of OREO were $1.6 million and $1.5 million for the years ended December 31, 2020
and 2019, respectively.
NOTE H
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
BancShares' annual impairment test, conducted as of July 31 each year, or more
frequently if events occur or circumstances change that may trigger a decline in
the value of the reporting unit or otherwise indicate that a potential
impairment exists, resulted in no indication of goodwill impairment. Subsequent
to the annual impairment test, there were no events or changes in circumstances
that would indicate goodwill should be tested for impairment during the interim
period between annual tests. No goodwill impairment was recorded during 2020 or
2019.
The following table presents the changes in the carrying amount of goodwill as of December 31, 2020 and 2019:
Year ended December 31
(Dollars in thousands) 2020 2019
Balance at January 1 $ 349,398 $ 236,347
Recognized in the Community Financial acquisition 686 -
Measurement period adjustments(1) 214 -
Recognized in the Biscayne Bancshares acquisition - 46,521
Recognized in the First South Bancorp acquisition - 13,896
Recognized in the Entegra acquisition - 52,634
Balance at December 31 $ 350,298 $ 349,398
(1)See Note B, Business Combinations for additional information
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Other Intangible Assets Other intangible assets include mortgage servicing rights ("MSRs") on loans sold to third parties with servicing retained, core deposit intangibles which represent the estimated fair value of acquired core deposits and other customer relationships, and other intangible assets acquired such as other servicing rights and noncompete agreements. Mortgage Servicing Rights Our portfolio of residential mortgage loans serviced for third parties was $3.31 billion, $3.38 billion and $2.95 billion as of December 31, 2020, 2019 and 2018, respectively. The majority of these loans were originated by BancShares and sold to third parties on a non-recourse basis with servicing rights retained. At December 31, 2020, a portion of the MSRs were related to originations by Entegra prior to acquisition. These retained servicing rights are recorded as a servicing asset and reported in other intangible assets. The mortgage servicing rights are initially recorded at fair value and then carried at the lower of amortized cost or fair market value. The amortization expense related to mortgage servicing rights is included as a reduction of mortgage income. The activity of the mortgage servicing asset for the years ended December 31, 2020, 2019 and 2018 is presented in the following table: (Dollars in thousands) 2020
2019 2018
Balance at January 1 $ 22,963 $ 21,396 $ 21,945
Servicing rights originated 8,006 6,149 5,258
Servicing rights acquired in Entegra transaction - 1,873
-
Amortization (8,400) (6,233) (5,807)
Valuation allowance increase (4,143) (222) -
Balance at December 31 $ 18,426 $ 22,963 $ 21,396
The following table presents the activity in the servicing asset valuation allowance for the years ended December 31, 2020, 2019 and 2018:
(Dollars in thousands) 2020 2019 2018
Beginning balance $ 222 $ - $ -
Valuation allowance increase 4,143 222 -
Ending balance $ 4,365 $ 222 $ -
Valuation of mortgage servicing rights is performed using a pooling methodology.
Similar loans are pooled together and evaluated on a discounted earnings basis
to determine the present value of future earnings.
Contractually specified mortgage servicing fees, late fees and ancillary fees
earned for the years ended December 31, 2020, 2019 and 2018, were $8.5 million,
$7.9 million and $7.5 million, respectively, and reported in mortgage income.
Key economic assumptions used to value mortgage servicing rights as of
December 31, 2020 and 2019, were as follows:
2020 2019
Discount rate - conventional fixed loans 7.92 % 8.92 % Discount rate - all loans excluding conventional fixed loans 8.92 % 9.92 % Weighted average constant prepayment rate 20.62 % 13.72 % Weighted average cost to service a loan $ 87.58
$ 87.09
The discount rate is based on the 10-yearU.S. Treasury rate plus 700 basis points for conventional fixed loans and 800 basis points for all other loans. The 700 and 800 basis points are used as a risk premium when calculating the discount rate. The prepayment rate is derived from the Public Securities Association Standard Prepayment model, which compared to actual prepayment rates annually for reasonableness. The average cost to service a loan is based on the number of loans serviced and the total costs to service the loans. Core Deposit Intangibles Core deposit intangibles represent the estimated fair value of core deposits and other customer relationships acquired. They are being amortized on an accelerated basis over their estimated useful lives. The weighted average useful life of core deposit intangibles acquired in 2020 is 9 years. 99
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following information relates to core deposit intangible assets, which are being amortized over their estimated useful lives:
(Dollars in thousands) 2020 2019
Balance at January 1 $ 43,386 $ 48,232
Acquired in Community Financial transaction 536 -
Acquired in Biscayne Bancshares transaction - 4,745
Acquired in First South Bancorp transaction - 2,268
Acquired in Entegra transaction - 4,487
Amortization (14,255) (16,346)
Balance at December 31 $ 29,667 $43,386
The gross amount of core deposit intangible assets and accumulated amortization as of December 31, 2020 and 2019, are:
(Dollars in thousands) 2020 2019
Gross balance $ 127,842 $ 154,507
Accumulated amortization (98,175) (111,121)
Carrying value $ 29,667 $ 43,386
Based on current estimated useful lives and carrying values, BancShares
anticipates amortization expense for core deposit intangibles in subsequent
periods will be:
(Dollars in thousands)
2021 $ 10,948
2022 7,743
2023 5,129
2024 2,658
2025 and subsequent 3,189
$ 29,667
NOTE I
DEPOSITS
Deposits at December 31, 2020 and 2019 were as follows:
(Dollars in thousands) 2020 2019
Demand $ 18,014,029 $ 12,926,796
Checking with interest 10,591,687 8,284,302
Money market accounts 8,632,713 6,817,752
Savings 3,304,167 2,564,777
Time 2,889,013 3,837,609
Total deposits $ 43,431,609 $ 34,431,236
Time deposits with a denomination of $250,000 or more were $670.4 million and $891.2 million at December 31, 2020 and 2019, respectively. At December 31, 2020, the scheduled maturities of time deposits were:
(Dollars in thousands) Year ended December 31
2021 $ 1,844,860
2022 648,516
2023 143,272
2024 67,908
2025 42,960
Thereafter 141,497
Total time deposits $ 2,889,013
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE J BORROWINGS Short-term Borrowings Short-term borrowings at December 31, 2020 and 2019 are as follows: (Dollars in thousands) 2020
2019
Securities sold under customer repurchase agreements $ 641,487 $ 442,956
Notes payable to FHLB of Atlanta - 255,000
Other short-term debt - 40,277
Total short-term borrowings $ 641,487 $ 738,233
At December 31, 2020, BancShares had unused credit lines allowing contingent access to overnight borrowings of up to $598.0 million on an unsecured basis. Additionally, under borrowing arrangements with the FRB ofRichmond and FHLB ofAtlanta , BancShares has access to an additional $11.31 billion on a secured basis. Repurchase Agreements BancShares utilizes securities sold under agreements to repurchase to facilitate the needs of customers and secure wholesale funding needs. Repurchase agreements are transactions whereby BancShares offers to sell to a counterparty an undivided interest in an eligible security at an agreed upon purchase price, and which obligates BancShares to repurchase the security at an agreed upon date, repurchase price and interest rate. These agreements are recorded at the amount of cash received in connection with the transaction and are reflected as securities sold under customer repurchase agreements. BancShares monitors collateral levels on a continuous basis and maintains records of each transaction specifically describing the applicable security and the counterparty's fractional interest in that security, and segregates the security from general assets in accordance with regulations governing custodial holdings of securities. The primary risk with repurchase agreements is market risk associated with the investments securing the transactions, as additional collateral may be required based on fair value changes of the underlying investments. Securities pledged as collateral under repurchase agreements are maintained with safekeeping agents. The carrying value of investment securities pledged as collateral under repurchase agreements was $689.3 million and $477.6 million at December 31, 2020 and December 31, 2019, respectively. At December 31, 2020, BancShares held $641.5 million of securities sold under agreements to repurchase, with overnight and continuous remaining contractual maturities, made up of $432.8 million collateralized by government agency securities and $208.7 million collateralized by commercial mortgage-backed securities. At December 31, 2019, BancShares held securities sold under agreements to repurchase of $443.0 million, with overnight and continuous remaining contractual maturities collateralized by government agency securities. 101
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Long-term Borrowings Long-term borrowings at December 31, 2020 and 2019 include: (Dollars in thousands)
2020 2019
Fixed-to-Floating subordinated notes at 3.375% maturing March 15, 2030
$ 350,000 $ - Junior subordinated debenture at 3-month LIBOR plus 1.75% maturing June 30, 2036
88,145 88,145
Junior subordinated debenture at 3-month LIBOR plus 2.25% maturing June 15, 2034
19,588 19,588
Junior subordinated debenture at 3-month LIBOR plus 2.85% maturing April 7, 2034
10,310 10,310
Junior subordinated debentures at 3-month LIBOR plus 2.80% maturing March 30, 2034
14,433 14,433
Junior subordinated debentures at 7.00% maturing December 31, 2026(1) 20,000
20,000
Junior subordinated debentures at 6.50% maturing October 1, 2025(2)
7,500 7,500
Junior subordinated debentures at 7.13% called February 25, 2020(2)
- 5,000
Notes payable to FHLBs of
655,175 317,191
Unsecured term loan at 1-month LIBOR plus 1.10% maturing September 5, 2022
82,125 96,425
Obligations under capitalized leases extending to December 2050 6,308 8,230
Unamortized issuance costs (3,459) -
Unamortized purchase accounting adjustments(3) (1,999) (1,569)
Other long-term debt 37 3,385
Total long-term obligations $ 1,248,163 $ 588,638
(1) Assumed in HomeBancorp acquisition.
(2) Assumed in Biscayne BancShares acquisition.
(3) At December 31, 2020, unamortized purchase accounting adjustments were $2.0 million for subordinated
debentures. At December 31, 2019, unamortized purchase accounting adjustments were $1.6 million for
subordinated debentures and $6 thousand for FHLB advances.
Issuance of Subordinated Debt
On March 4, 2020, BancShares completed its public offering of $350 million
aggregate principal amount of its 3.375% Fixed-to-Floating Rate Subordinated
Notes due 2030 and redeemable at the option of BancShares starting with the
interest payment due March 15, 2025, subject to obtaining the prior approval of
the Federal Reserve to the extent such approval is then required under the rules
of the Federal Reserve , or earlier upon the occurrence of certain events.
At December 31, 2020 and 2019, BancShares held $132.5 million in junior
subordinated debentures representing obligations to FCB/NC Capital Trust III,
FCB/SC Capital Trust II, SCB Capital Trust I and Macon Capital Trust I special
purpose entities and grantor trusts ("the Trusts") for trust preferred
securities. The Trusts had outstanding trust preferred securities of $128.5
million at December 31, 2020 and 2019, which mature in 2036, 2034, 2034 and
2034, respectively, and may be redeemed at par in whole or in part at any time.
BancShares has guaranteed all obligations of its subsidiaries, FCB Capital Trust
III and FCB/SC Capital Trust II. FCB has guaranteed all obligations of its trust
subsidiaries, SCB Capital Trust I and Macon Capital Trust I, which was acquired
from Entegra during the fourth quarter of 2019 and has a related obligation of
$14.4 million.
Long-term borrowings maturing in each of the five years subsequent to
December 31, 2020 and thereafter include:
(Dollars in thousands) Year ended December 31
2021 $ 10,000
2022 98,709
2023 125,500
2024 6,144
2025 7,500
Thereafter 1,000,310
Total long-term borrowings $ 1,248,163
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE K
FDIC SHARED-LOSS PAYABLE
At December 31, 2020, shared-loss protection remains for single family
residential loans acquired in the amount of $34.5 million. The shared-loss
agreements for two FDIC -assisted transactions include provisions related to
payments owed to the FDIC at the termination of the agreements if actual
cumulative losses on covered assets are lower than originally estimated by the
FDIC at the time of acquisition ("clawback liability"). As of December 31, 2020
and 2019, the estimated clawback liability was $15.6 million and $112.4 million,
respectively, as a result of a payment to the FDIC in the first quarter of 2020
for $99.5 million related to one of the transactions. We expect to make a
clawback liability payment to the FDIC in March 2021 in the amount of
$15.9 million.
The following table provides changes in the FDIC shared-loss payable for the
years ended December 31, 2020 and 2019.
(Dollars in thousands) 2020 2019
Beginning balance $ 112,395 $ 105,618
Accretion 2,674 6,777
Payment made to the
-
Ending balance $ 15,601 $ 112,395
NOTE L
SHAREHOLDERS' EQUITY, DIVIDEND RESTRICTIONS AND OTHER REGULATORY MATTERS
BancShares and FCB are required to meet minimum capital requirements set forth
by regulatory authorities. Certain activities such as, the ability to undertake
new business initiatives, including acquisitions, the access to and cost of
funding for new business initiatives, the ability to pay dividends, the ability
to repurchase shares or other capital instruments, the level of deposit
insurance costs, and the level and nature of regulatory oversight depend, in
large part, on a financial institution's capital strength.
Bank regulatory agencies approved regulatory capital guidelines ("Basel III")
aimed at strengthening existing capital requirements for banking organizations.
Basel III became effective for BancShares on January 1, 2015. Under Basel III,
requirements include a common equity Tier 1 ratio minimum of 4.50%, Tier 1
risk-based capital minimum of 6.00%, total risk-based capital ratio minimum of
8.00% and Tier 1 leverage capital ratio minimum of 4.00%. Failure to meet
minimum capital requirements may result in certain actions by regulators that
could have a direct, material effect on the consolidated financial statements.
Based on the most recent notifications from its regulators, BancShares and FCB
is well-capitalized under the regulatory framework for prompt corrective action.
As of December 31, 2020, BancShares and FCB met all capital adequacy
requirements to which they are subject and were not aware of any conditions or
events that would affect each entity's well-capitalized status.
Following is an analysis of capital ratios under Basel III guidelines for
BancShares and FCB as of December 31, 2020 and 2019:
December 31, 2020 December 31, 2019
Requirements to be
(Dollars in thousands) well-capitalized Amount Ratio Amount Ratio
BancShares
Total risk-based capital 10.00 % $ 4,577,212 13.81 % $ 3,731,501 12.12 %
Tier 1 risk-based capital 8.00 3,856,086 11.63 3,344,305 10.86
Common equity Tier 1 6.50 3,516,149 10.61 3,344,305 10.86
Leverage capital 5.00 3,856,086 7.86 3,344,305 8.81
FCB
Total risk-based capital 10.00 4,543,496 13.72 3,837,670 12.46
Tier 1 risk-based capital 8.00 4,276,870 12.92 3,554,974 11.54
Common equity Tier 1 6.50 4,276,870 12.92 3,554,974 11.54
Leverage capital 5.00 4,276,870 8.72 3,554,974 9.38
As of January 1, 2019, the capital conservation buffer was fully phased in at
2.50%. BancShares and FCB had capital conservation buffers of 5.63% and 5.72%,
respectively, at December 31, 2020.
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) At December 31, 2020, Tier 2 capital of BancShares included $128.5 million of trust preferred capital securities and $377.5 million of qualifying subordinated debentures, compared to $128.5 million of trust preferred capital securities and $32.5 million of qualifying subordinated debentures included at December 31, 2019. BancShares has two classes of common stock-Class A common and Class B common shares. Shares of Class A common have one vote per share, while shares of Class B common have 16 votes per share. During 2020, BancShares repurchased a total of 813,090 shares of Class A common stock, or 8.4% of outstanding shares of as of December 31, 2019, for $333.8 million at an average cost per share of $410.48. During 2019, BancShares repurchased a total of 998,910 shares of Class A common stock, or 9.4% of outstanding shares of as of December 31, 2018, for $450.8 million at an average cost per share of $451.33. All share repurchases were executed under previously approved authorities. Upon expiration of the most recent share repurchase authorization on July 31, 2020, share repurchase activity has ended and will be reevaluated in subsequent periods. Issuance of Depositary Shares On March 12, 2020, BancShares issued and sold an aggregate of 13,800,000 depositary shares (the "Depositary Shares"), each representing a 1/40th interest in a share of 5.375% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share (the "Series A Preferred Stock"), with a liquidation preference of $25 per Depositary Share (equivalent to $1,000 per share of the Series A Preferred Stock) for a total of $345 million. The capital raise provides liquidity for general corporate purposes, which may include, but is not limited to, providing capital to support our growth organically or through strategic acquisitions, financing investments and capital expenditures, for funding investments inFirst Citizens Bank as regulatory capital, and redeeming or repurchasing BancShares' common stock. Dividend Restrictions The Board of Directors of FCB may approve distributions, including dividends, as it deems appropriate, subject to the requirements of theFDIC and the General Statutes ofNorth Carolina , provided that the distributions do not reduce capital below applicable capital requirements. As of December 31, 2020, the maximum amount of distributions was limited to $1.70 billion to preserve well-capitalized status. Dividends declared by FCB and paid to BancShares amounted to $229.7 million in 2020, $149.8 million in 2019 and $242.9 million in 2018. Payment of dividends is made at the discretion of the Board of Directors and is contingent upon satisfactory earnings as well as projected future capital needs. BancShares' principal source of liquidity for payment of shareholder dividends is the dividend it receives from FCB. BancShares and FCB are subject to various requirements imposed by state and federal banking statutes and regulations, including regulations requiring the maintenance of reserve balances at theFederal Reserve Bank . Banks are allowed to reduce the required balances by the amount of vault cash. For 2020, the requirements averaged $115.2 million. Effective March 26, 2020, theFederal Reserve Board reduced the reserve requirement ratio to 0%, eliminating the reserve requirement for all depository institutions. 104
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE M
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) included the following at
December 31, 2020 and 2019:
December 31, 2020 December 31, 2019
Accumulated Accumulated Accumulated Accumulated
other other other other
comprehensive Deferred comprehensive comprehensive Deferred comprehensive
income tax expense income (loss), income tax expense income (loss),
(Dollars in thousands) (loss) (benefit) net of tax (loss) (benefit) net of tax
Unrealized gains on
securities available for
sale $ 102,278 $ 23,524 $ 78,754 $ 7,522 $ 1,730 $ 5,792
Unrealized gains on
securities available for
sale transferred from (to)
held to maturity 5,399 1,242 4,157 - - -
Defined benefit pension
items (91,751) (21,103) (70,648) (172,098) (39,583) (132,515)
Total $ 15,926 $ 3,663 $ 12,263 $ (164,576) $ (37,853) $ (126,723)
The following table highlights changes in accumulated other comprehensive income (loss) by component for the years ended December 31, 2020 and 2019:
Unrealized gains
(losses) on
securities
available for sale
Unrealized gains (losses) on transferred to
securities held to Defined benefit
(Dollars in thousands) available-for-sale(1) maturity(1)(2) pension items(1) Total
Balance at January 1, 2019 $ (38,505) $ (71,149) $ (125,533) $ (235,187)
Net unrealized gains (losses) arising
during period 49,776 55,834 (15,438) 90,172
Amounts reclassified from accumulated
other comprehensive loss (5,479) 15,315 8,456 18,292
Net current period other comprehensive
income (loss) 44,297 71,149 (6,982) 108,464
Balance at December 31, 2019 5,792 - (132,515) (126,723)
Net unrealized gains arising during
period 119,357 4,538 42,367 166,262
Amounts reclassified from accumulated
other comprehensive loss (46,395) (381) 19,500 (27,276)
Net current period other comprehensive
income 72,962 4,157 61,867 138,986
Balance at December 31, 2020 $ 78,754 $ 4,157 $ (70,648) $ 12,263
(1) All amounts are net of tax. Amounts in parentheses indicate debits.
(2) Net unrealized gains (losses) represent unrealized gains and losses related
to the reclassification of investment securities between categories. See Note C,
Investments, for additional information.
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table presents the amounts reclassified from accumulated other comprehensive income (loss) and the line item affected in the statement where net income is presented for years ended December 31, 2020 and 2019: (Dollars in thousands) Year ended December 31, 2020 Amount reclassified from accumulated other Affected line item in the Details about accumulated other comprehensive income comprehensive
statement where net income
(loss) income (loss)(1) is presented
Realized gains on
investment securities
Unrealized gains on available for sale securities $ 60,253 available for sale, net
(13,858) Income taxes
$ 46,395
Amortization of unrealized gains on securities
available for sale transferred to held to maturity $ 495 Net interest income
(114) Income taxes
$ 381
Amortization of actuarial losses on defined benefit pension items
$ (25,324) Other noninterest expense
5,824 Income taxes
$ (19,500)
Total reclassifications for the period $ 27,276
Year ended December 31, 2019
Amount
reclassified from
accumulated other Affected line item in the
Details about accumulated other comprehensive (loss) comprehensive statement where net income
income income (loss)(1) is presented
Realized gains on
investment securities
Unrealized gains on available for sale securities $ 7,115 available for sale, net
(1,636) Income taxes
$ 5,479
Amortization of unrealized losses on securities available for sale transferred to held to maturity $ (19,889) Net interest income
4,574 Income taxes
$ (15,315)
Amortization of defined benefit pension items
Prior service costs $ (57) Salaries and wages
Actuarial losses (10,924) Other noninterest expense
(10,981) Income before income taxes
2,525 Income taxes
$ (8,456)
Total reclassifications for the period $
(18,292)
(1) Amounts in parentheses indicate debits to profit/loss.
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE N
OTHER NONINTEREST INCOME AND OTHER NONINTEREST EXPENSE
Other noninterest income for the years ended December 31, 2020, 2019 and 2018
was $7.4 million, $18.4 million and $19.7 million, respectively. Prior to the
adoption of ASC 326, the most significant item in other noninterest income was
recoveries on PCI loans previously charged-off. BancShares recorded the portion
of recoveries related to loans and leases written off prior to the closing of an
acquisition as noninterest income rather than as an adjustment to the allowance
for loan losses. These recoveries were $17.4 million and $16.6 million for the
years ended December 31, 2019 and 2018, respectively. Following the adoption of
ASC 326, these recoveries are recorded as an adjustment to the ACL. Other
noninterest income also includes FHLB dividends and other various income items.
Other noninterest expense for the years ended December 31, 2020, 2019 and 2018
included the following:
(Dollars in thousands) 2020 2019 2018
Core deposit intangible amortization $ 14,255 $ 16,346
$ 17,165
Consultant expense 12,751 12,801 14,345
Advertising expense 10,010 11,437 11,650
Telecommunications expense 12,179 9,391 10,471
Other 95,922 89,308 93,432
Total other noninterest expense $ 145,117 $ 139,283
$ 147,063
Other expense consists of miscellaneous expenses including travel, postage,
supplies, appraisal expense and other operational losses. Advertising expense
related to non-direct response advertisements are expensed as incurred.
NOTE O
INCOME TAXES
At December 31, 2020, 2019 and 2018 income tax expense consisted of the
following:
(Dollars in thousands) 2020 2019 2018
Current tax expense
Federal $ 137,162 $ 68,984 $ 95,151
State 14,532 11,095 21,523
Total current tax expense 151,694 80,079 116,674
Deferred tax (benefit) expense
Federal (28,535) 50,522 (10,944)
State 3,000 4,076 (2,433)
Total deferred tax (benefit) expense (25,535) 54,598 (13,377)
Total income tax expense $ 126,159 $ 134,677 $ 103,297
Income tax expense differed from the amounts computed by applying the statutory
federal income tax rate of 21% to pretax income as a result of the following:
(Dollars in thousands) 2020 2019 2018
Income taxes at federal statutory rates $ 129,755 $ 124,330 $ 105,758
Increase (reduction) in income taxes resulting
from:
Nontaxable income on loans, leases and investments,
net of nondeductible expenses (1,581) (1,639) (1,796)
Excess tax benefits of compensation 1,146 1,070 371
State and local income taxes, including any change in valuation allowance, net of federal income tax benefit
13,850 11,985 15,081
Effect of federal rate change - - (15,736)
Tax credits net of amortization (5,367) (4,474) (2,891)
Repayment of claim of right income (13,926) - -
Other, net 2,282 3,405 2,510
Total income tax expense $ 126,159 $ 134,677 $ 103,297
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The net deferred tax liability included the following components at December 31,
2020, and 2019:
(Dollars in thousands) 2020 2019
Allowance for credit losses $ 52,293 $ 53,073
Operating lease liabilities 15,737 17,752
Executive separation from service agreements 8,989 12,334
Net operating loss carryforwards 9,545 11,085
Employee compensation 16,083 13,313
FDIC assisted transactions timing differences - 8,678
Other reserves 5,376 5,001
Other 6,898 10,698
Deferred tax asset 114,921 131,934
Accelerated depreciation 14,984 51,249
Lease financing activities 15,265 8,101
Operating lease assets 15,670 17,837Net unrealized gain on securities included in accumulated other comprehensive loss
24,857 1,821
Net deferred loan fees and costs 13,975 11,781
Intangible assets 13,012 9,148
Security, loan and debt valuations 2,051 5,767
FDIC assisted transactions timing differences 2,393 -
Pension liability 44,549 5,079
Other 10,193 15,993
Deferred tax liability 156,949 126,776
Net deferred tax (liability) asset $ (42,028) $ 5,158
At December 31, 2020, the gross tax benefit related to net operating loss carryforwards were $41.7 million and $19.5 million related to federal and state taxes, respectively. These carryforwards expire in years beginning in 2024. The net operating losses were obtained through various acquisitions and are subject to the annual limitations set forth by Internal Revenue Code Section 382. No valuation allowance was necessary as of December 31, 2020 and 2019, to reduce BancShares' gross deferred tax asset to the amount more likely than not to be realized. Income tax expense for 2020 was favorably impacted by $13.9 million due to BancShares' decision in the second quarter to utilize an allowable alternative for computing its 2020 federal income tax liability. The allowable alternative provides BancShares the ability to use the federal income tax rate for certain current year deductible amounts related to prior yearFDIC -assisted acquisitions that was applicable when these amounts were originally subjected to tax. BancShares regularly adjusts its net deferred tax asset as a result of changes in tax rates in the state where it files tax returns. These changes in tax rates did not have a material impact on tax expense in 2020, 2019 or 2018. BancShares' and its subsidiaries' federal income tax returns for 2017 through 2019 remain open for examination. Generally, BancShares is no longer subject to examination by state and local taxing authorities for taxable years prior to 2015. The following table provides a rollforward of BancShares' gross unrecognized tax benefits, excluding interest and penalties, during the years ended December 31, 2020, 2019 and 2018: (Dollars in thousands) 2020 2019 2018 Unrecognized tax benefits at the beginning of the year $ 32,226 $ 28,255 $ 29,004 Additions (reductions) related to tax positions taken in prior year 153 (683) (1,054) Additions related to tax positions taken in current year 1,295 6,554 1,433 Settlements (1,516) - - Reductions related to lapse of statute of limitations (783) (1,900) (1,128)
Unrecognized tax benefits at the end of the year $ 31,375 $ 32,226 $ 28,255
All of the unrecognized tax benefits, if recognized, would affect BancShares' effective tax rate. BancShares has unrecognized tax benefits relating to uncertain state tax positions inNorth Carolina and other state jurisdictions resulting from tax filings submitted to the states. No tax benefit has been recorded for these uncertain tax positions in the consolidated financial statements. BancShares does not expect the unrecognized tax benefits to change significantly during 2021. 108
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) BancShares recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. BancShares recognized $467 thousand, ($135) thousand and $114 thousand for the years ended December 31, 2020, 2019 and 2018, respectively. BancShares had $896 thousand and $429 thousand accrued for the payment of interest and penalties as of December 31, 2020 and 2019, respectively. NOTE P ESTIMATED FAIR VALUES Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. BancShares estimates fair value using discounted cash flows or other valuation techniques when there is no active market for a financial instrument. Inputs used in these valuation techniques are subjective in nature, involve uncertainties and require significant judgment. Therefore, the derived fair value estimates presented below are not necessarily indicative of the amounts BancShares would realize in a current market exchange. Assets and liabilities are recorded at fair value according to a fair value hierarchy comprised of three levels. The levels are based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The level within the fair value hierarchy for an asset or liability is based on the lowest level of input significant to the fair value measurement with Level 1 inputs considered highest and Level 3 inputs considered lowest. A brief description of each input level follows: •Level 1 inputs are quoted prices in active markets for identical assets and liabilities. •Level 2 inputs are quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted prices observable for the assets or liabilities and market corroborated inputs. •Level 3 inputs are unobservable inputs for the asset or liability. These unobservable inputs and assumptions reflect the estimates market participants would use in pricing the asset or liability. BancShares' management reviews any changes to its valuation methodologies to ensure they are appropriate and supportable, and refines valuation methodologies as more market-based data becomes available. Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period. The methodologies used to estimate the fair value of financial assets and financial liabilities are discussed below. Investment securities available for sale. The fair value ofU.S. Treasury , government agency, mortgage-backed and municipal securities and a portion of our corporate bonds are generally estimated using a third party pricing service. The third party provider evaluates securities based on comparable investments with trades and market data and will utilize pricing models which use a variety of inputs, such as benchmark yields, reported trades, issuer spreads, benchmark securities, bids and offers as needed. These securities are generally classified as Level 2. The remaining corporate bonds held are generally measured at fair value based on indicative bids from broker-dealers using inputs that are not directly observable. These securities are considered Level 3. Marketable equity securities. Equity securities are measured at fair value using observable closing prices. The valuation also considers the amount of market activity by examining the trade volume of each security. Equity securities are classified as Level 1 if they are traded in an active market and as Level 2 if the observable closing price is from a less than active market. Loans held for sale. Certain residential real estate loans originated to be sold to investors are carried at fair value based on quoted market prices for similar types of loans. Accordingly, the inputs used to calculate fair value of originated residential real estate loans held for sale are considered Level 2 inputs. Portfolio loans subsequently transferred to held for sale to be sold in the secondary market are transferred at fair value. The fair value of the transferred portfolio loans is based on quoted prices and considered Level 1 inputs. Net loans and leases (Non-PCD and PCD). Fair value is estimated based on discounted future cash flows using the current interest rates at which loans with similar terms would be made to borrowers of similar credit quality. The inputs used in the fair value measurements for loans and leases are considered Level 3 inputs. 109
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FHLB stock. The carrying amount of FHLB stock is a reasonable estimate of fair
value, as these securities are not readily marketable and are evaluated for
impairment based on the ultimate recoverability of the par value. BancShares
considers positive and negative evidence, including the profitability and asset
quality of the issuer, dividend payment history and recent redemption
experience, when determining the ultimate recoverability of the par value.
BancShares investment in FHLB stock is ultimately recoverable at par. The inputs
used in the fair value measurement for the FHLB stock are considered Level 2
inputs.
Mortgage and other servicing rights. Mortgage and other servicing rights are
carried at the lower of amortized cost or market and are, therefore, carried at
fair value only when fair value is less than the amortized cost. The fair value
of mortgage and other servicing rights is performed using a pooling methodology.
Similar loans are pooled together and a model which relies on discount rates,
estimates of prepayment rates and the weighted average cost to service the loans
is used to determine the fair value. The inputs used in the fair value
measurement for mortgage and other servicing rights are considered Level 3
inputs.
Deposits. For deposits with no stated maturity, the carrying value is a
reasonable estimate of fair value. The fair value of time deposits is estimated
by discounting future cash flows using the interest rates currently offered for
deposits of similar remaining maturities. The inputs used in the fair value
measurement for deposits are considered Level 2 inputs.
Borrowings. For borrowings, the fair values are determined based on recent
trades or sales of the actual security, if available. Otherwise, fair values are
estimated by discounting future cash flows using current interest rates for
similar financial instruments. The inputs used in the fair value measurement for
FHLB borrowings, subordinated debentures, and other borrowings are considered
Level 2 inputs.
Payable to the FDIC for shared-loss agreements. The fair value of the payable to
the FDIC for shared-loss agreements is determined by the projected cash flows
based on expected payments to the FDIC in accordance with the shared-loss
agreements. Cash flows are discounted using current discount rates to reflect
the timing of the estimated amounts due to the FDIC . The inputs used in the fair
value measurement for the payable to the FDIC are considered Level 3 inputs.
Off-balance-sheet commitments and contingencies. Carrying amounts are reasonable
estimates of the fair values for such financial instruments. Carrying amounts
include unamortized fee income and, in some cases, reserves for any credit
losses from those financial instruments. These amounts are not material to
BancShares' financial position.
For all other financial assets and financial liabilities, the carrying value is
a reasonable estimate of the fair value as of December 31, 2020 and 2019. The
carrying value and fair value for these assets and liabilities are equivalent
because they are relatively short-term in nature and there is no interest rate
or credit risk that would cause the fair value to differ from the carrying
value. Cash and due from banks is classified on the fair value hierarchy as
Level 1. Overnight investments, income earned not collected and accrued interest
payable are considered Level 2.
The table presents the carrying values and estimated fair values for financial
instruments as of December 31, 2020 and 2019.
December 31, 2020 December 31, 2019
(Dollars in thousands) Carrying value Fair value Carrying value Fair value
Cash and due from banks $ 362,048 $ 362,048 $ 376,719 $ 376,719 Overnight investments
4,347,336 4,347,336 1,107,844 1,107,844
Investment securities available for sale 7,014,243 7,014,243 7,059,674 7,059,674
Investment securities held to maturity 2,816,982 2,838,499 30,996 30,996
Investment in marketable equity securities 91,680 91,680 82,333 82,333
Loans held for sale 124,837 124,837 67,869 67,869
Net loans and leases 32,567,661 33,298,166 28,656,355 28,878,550
Income earned not collected 145,694 145,694 123,154 123,154
Federal Home Loan Bank stock 45,392 45,392 43,039 43,039
Mortgage and other servicing rights 19,628 20,283 24,891 26,927
Deposits with no stated maturity 40,542,596 40,542,596 30,593,627 30,593,627
Time deposits 2,889,013 2,905,577 3,837,609 3,842,162
Securities sold under customer repurchase
agreements 641,487 641,487 442,956 442,956
Federal Home Loan Bank borrowings 655,175 677,579 572,185 577,362
Subordinated debt 504,518 525,610 163,412 173,685
Other borrowings 88,470 89,263 148,318 149,232
FDIC shared-loss payable 15,601 15,843 112,395 114,252
Accrued interest payable 9,414 9,414 18,124 18,124
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Among BancShares' assets and liabilities, investment securities available for sale, marketable equity securities and loans held for sale are reported at their fair values on a recurring basis. For assets and liabilities carried at fair value on a recurring basis, the following table provides fair value information as of December 31, 2020 and 2019.
December 31, 2020
Fair value measurements using:
(Dollars in thousands) Fair value Level 1 Level 2 Level 3
Assets measured at fair value
Investment securities available for sale
U.S. Treasury $ 499,933 $ - $ 499,933 $ -
Government agency 701,391 - 701,391 -
Residential mortgage-backed securities 4,438,103 - 4,438,103 -
Commercial mortgage-backed securities 771,537 - 771,537 -
Corporate bonds 603,279 - 286,655 316,624
Total investment securities available for sale $ 7,014,243 $
- $ 6,697,619 $ 316,624
Marketable equity securities $ 91,680 $ 32,855 $ 58,825 -
Loans held for sale 124,837 - 124,837 -
December 31, 2019
Fair value measurements using:
Fair value Level 1 Level 2 Level 3
Assets measured at fair value
Investment securities available for sale
U.S. Treasury $ 409,999 $ - $ 409,999 $ -
Government agency 682,772 - 682,772 -
Residential mortgage-backed securities 5,267,090 - 5,267,090 -
Commercial mortgage-backed securities 380,020 - 380,020 -
Corporate bonds 201,566 - 131,881 69,685
State, county and municipal 118,227 - 118,227 -Total investment securities available for sale $ 7,059,674 $
- $ 6,989,989 $ 69,685
Marketable equity securities $ 82,333 $ 29,458 $ 52,875 $ -
Loans held for sale 67,869 - 67,869 -
During the year ended December 31, 2020, $1.8 million of corporate bonds
available for sale were transferred from Level 2 to Level 3. The transfers were
due to a lack of observable inputs and trade activity for those securities.
During the year ended December 31, 2019, $112.6 million of corporate bonds
available for sale were transferred from Level 3 to Level 2. The transfers were
due to the availability of additional observable inputs for those securities.
The following table summarizes activity for Level 3 assets for the years ended
December 31, 2020 and 2019:
2020 2019
(Dollars in thousands) Corporate bonds Corporate bonds
Beginning balance $ 69,685 $ 143,226
Purchases(1) 242,595 35,993Unrealized net gains included in other comprehensive income
2,898 3,891
Amounts included in net income (336) 174
Transfers in 1,782 -
Transfers out - (112,599)
Sales / Calls - (1,000)
Ending balance $ 316,624 $ 69,685
(1) The year ended December 31, 2019, includes Corporate bonds of $500 thousand acquired in Entegra
transaction.
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents quantitative information about Level 3 fair value measurements for fair value on a recurring basis at December 31, 2020. (Dollars in thousands)
December 31, 2020
Level 3 assets Valuation technique Significant unobservable input Fair Value
Corporate bonds Indicative bid Multiple factors, including but not limited
provided by broker to, current operations, financial condition,
cash flows, and recently executed financing
transactions related to the issuer $ 316,624
Fair Value Option
BancShares has elected the fair value option for residential real estate loans
originated to be sold. This election reduces certain timing differences in the
Consolidated Statements of Income and better aligns with the management of the
portfolio from a business perspective. The changes in fair value are recorded as
a component of mortgage income and were gains of $3.9 million, $289 thousand and
$50 thousand for the years ended December 31, 2020, 2019 and 2018, respectively.
The following table summarizes the difference between the aggregate fair value
and the unpaid principal balance for residential real estate loans originated
for sale measured at fair value as of December 31, 2020 and 2019.
December 31, 2020
(Dollars in thousands) Fair Value Unpaid Principal Balance Difference
Originated loans held for sale $ 124,837 $ 118,902 $ 5,935
December 31, 2019
Fair Value Unpaid Principal Balance Difference
Originated loans held for sale $ 67,869 $ 65,697 $ 2,172
No originated loans held for sale were 90 or more days past due or on nonaccrual
status as of December 31, 2020 or December 31, 2019.
Certain other assets are adjusted to their fair value on a nonrecurring basis,
including certain loans, OREO, goodwill, which are periodically tested for
impairment, and mortgage servicing rights, which are carried at the lower of
amortized cost or market. Most loans held for investment, deposits, and
borrowings are not reported at fair value.
Following the adoption of ASC 326, the population of loans measured at fair
value on a non-recurring basis has greatly diminished and is limited to
collateral-dependent loans evaluated individually. These collateral-dependent
loans are deemed to be at fair value if there is an associated allowance for
credit losses or if a charge-off has been recorded in the previous 12 months.
Collateral values are determined using appraisals or other third-party value
estimates of the subject property discounted based on estimated selling costs,
generally between 6% and 10%, and immaterial adjustments for other external
factors that may impact the marketability of the collateral. At December 31,
2020, the weighted average discount for estimated selling costs applied was
7.63%.
Prior to the adoption of ACS 326, impaired loans were considered to be at fair
value if an associated allowance adjustment or current period charge-off was
recorded. The value of impaired loans is determined by either collateral
valuations or discounted present value of the expected cash flow calculations.
Collateral values are determined using appraisals or other third-party value
estimates of the subject property with discounts generally between 6% and 11%
applied for estimated selling costs and other external factors that may impact
the marketability of the property. Expected cash flows are determined using
expected payment information at the individual loan level, discounted using the
effective interest rate. The effective interest rate for the majority of
impaired loans generally ranged between 3% and 7%.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
OREO acquired or written down within the previous 12 months is deemed to be at
fair value. Asset valuations are determined by using appraisals or other
third-party value estimates of the subject property with with discounts,
generally between 7% and 16%, applied for estimated selling costs and other
external factors that may impact the marketability of the property. At
December 31, 2020, the weighted average discount applied was 8.44%. Changes to
the value of the assets between scheduled valuation dates are monitored through
continued communication with brokers and monthly reviews by the asset manager
assigned to each asset. If there are any significant changes in the market or
the subject property, valuations are adjusted or new appraisals ordered to
ensure the reported values reflect the most current information.
Mortgage servicing rights are carried at the lower of cost or market and are,
therefore, carried at fair value only when fair value is less than amortized
cost. The fair value of mortgage servicing rights is performed using a pooling
methodology. Similar loans are pooled together and a discounted cash flow model,
which takes into consideration discount rates, prepayment rates, and the
weighted average cost to service the loans, are used to determine the fair
value.
For financial assets and liabilities carried at fair value on a nonrecurring
basis, the following table provides fair value information as of December 31,
2020 and December 31, 2019.
December 31, 2020
Fair value measurements using:
(Dollars in thousands) Fair value Level 1 Level 2 Level 3
Collateral-dependent loans 11,779 - - 11,779
Other real estate remeasured during the year 40,115 - - 40,115
Mortgage servicing rights 16,966 - - 16,966
December 31, 2019
Fair value measurements using:
Fair value Level 1 Level 2 Level 3
Impaired loans $ 132,336 $ - $ - $ 132,336 Other real estate remeasured during the year
38,310 - - 38,310
Mortgage servicing rights 3,757 - - 3,757
No financial liabilities were carried at fair value on a nonrecurring basis as of December 31, 2020 and December 31, 2019.
NOTE Q
EMPLOYEE BENEFIT PLANS
FCB sponsors benefit plans for its qualifying employees and former First
Citizens Bancorporation, Inc. employees ("legacy Bancorporation") including
noncontributory defined benefit pension plans, a 401(k) savings plan and an
enhanced 401(k) savings plan. These plans are qualified under the Internal
Revenue Code. FCB also maintains agreements with certain executives providing
supplemental benefits paid upon death or separation from service at an
agreed-upon age.
Defined Benefit Pension Plans
BancShares employees who were hired prior to April 1, 2007 and qualified under
length of service and other requirements are covered by the BancShares pension
plan, which was closed to new participants as of April 1, 2007. Discretionary
contributions of $80.0 million were made to the BancShares pension plan in 2020,
while discretionary contributions of $71 thousand were made in 2019.
Certain legacy Bancorporation employees who qualified under length of service
and other requirements are covered by the legacy Bancorporation pension plan,
which was closed to new participants as of September 1, 2007. Discretionary
contributions of $20.0 million were made to the legacy Bancorporation pension
plan for 2020, while discretionary contributions of $3.5 million were made for
2019.
Participants in the noncontributory defined benefit pension plans ("the Plans")
were fully vested in the Plans after five years of service. Retirement benefits
are based on years of service and highest annual compensation for five
consecutive years during the last ten years of employment. FCB makes
contributions to the Plans in amounts between the minimum required for funding
and the maximum amount deductible for federal income tax purposes. Management
evaluates the need for its pension plan contributions on a periodic basis based
upon numerous factors including, but not limited to, the pension plan funded
status, returns on plan assets, discount rates and the current economic
environment.
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Due to the Plans having the same terms in both form and substance, the following tables and disclosures will report the Plans in total. Obligations and Funded Status The following table provides the changes in benefit obligation and plan assets and the funded status of the Plans at December 31, 2020 and 2019. (Dollars in thousands) 2020
2019
Change in benefit obligation
Projected benefit obligation at January 1 $ 990,406 $ 852,975
Service cost 14,279 12,767
Interest cost 34,197 37,260
Actuarial losses 72,080 118,964
Benefits paid (33,309) (31,560)Projected benefit obligation at December 31 1,077,653 990,406
Change in plan assets
Fair value of plan assets at January 1 976,072 842,534
Actual return on plan assets 192,792 161,506
Employer contributions 100,000 3,592
Benefits paid (33,309) (31,560)
Fair value of plan assets at December 31 1,235,555 976,072
Funded status at December 31 $ 157,902 $(14,334)
The amount recognized in other assets at December 31, 2020 was $157.9 million.
The amount recognized in other liabilities at December 31, 2019 was $14.3
million.
The following table details the amounts recognized in accumulated other
comprehensive income at December 31, 2020 and 2019.
(Dollars in thousands) 2020 2019
Net actuarial loss $ 91,751 $ 172,098
The accumulated benefit obligation for the Plans at December 31, 2020 and 2019,
was $985.0 million and $904.5 million, respectively. The Plans use a measurement
date of December 31.
The following table shows the components of periodic benefit cost related to the
Plans and changes in plan assets and benefit obligations recognized in other
comprehensive income for the years ended December 31, 2020, 2019 and 2018.
Year ended December 31
(Dollars in thousands) 2020 2019 2018
Service cost $ 14,279 $ 12,767 $ 16,154
Interest cost 34,197 37,260 34,733
Expected return on assets (65,689) (62,590) (60,296)
Amortization of prior service cost - 57 79
Amortization of net actuarial loss 25,324 10,924 13,902
Total net periodic benefit cost (income) 8,111 (1,582) 4,572
Current year actuarial (gain) loss (55,023) 20,049 32,012
Amortization of actuarial loss (25,324) (10,924) (13,902)
Amortization of prior service cost - (57) (79)
Net (gain) loss recognized in other comprehensive income (80,347)
9,068 18,031
Total recognized in net periodic benefit cost and other comprehensive income
$ (72,236) $ 7,486 $ 22,603
Actuarial gains in 2020 were primarily driven by return on assets greater than
expected, partially offset by the impact of a decreased discount rate.
Service costs and the amortization of prior service costs are recorded in
personnel expense, while interest cost, expected return on plan assets and the
amortization of actuarial (gains)/losses are recorded in other noninterest
expense.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The assumptions used to determine the benefit obligations at December 31, 2020
and 2019 are as follows:
2020 2019
Discount rate 2.76 % 3.46 %
Rate of compensation increase 5.60 5.60
The assumptions used to determine the net periodic benefit cost for the years ended December 31, 2020, 2019 and 2018, are as follows:
2020 2019 2018
Discount rate 3.46 % 4.38 % 3.76 %
Rate of compensation increase 5.60 5.60 4.00
Expected long-term return on plan assets 7.50 7.50 7.50
The estimated discount rate, which represents the interest rate that could be
obtained for a suitable investment used to fund the benefit obligations, is
based on a yield curve developed from high-quality corporate bonds across a full
maturity spectrum. The projected cash flows of the pension plans are discounted
based on this yield curve and a single discount rate is calculated to achieve
the same present value.
The weighted average expected long-term rate of return on the Plans' assets
represents the average rate of return expected to be earned on the Plans' assets
over the period the benefits included in the benefit obligation are to be paid.
In developing the expected rate of return, historical and current returns, as
well as investment allocation strategies, on the Plans' assets are considered.
Plan Assets
For the Plans, our primary total return objective is to achieve returns over the
long term that will fund retirement liabilities and provide desired plan
benefits in a manner that satisfies the fiduciary requirements of the Employee
Retirement Income Security Act. The Plans' assets have a long-term time horizon
that runs concurrent with the average life expectancy of the participants. As
such, the Plans can assume a time horizon that extends well beyond a full market
cycle and can assume a reasonable level of risk. It is expected, however, that
both professional investment management and sufficient portfolio diversification
will smooth volatility and help generate a consistent level of return. The
investments are broadly diversified across global, economic and market risk
factors in an attempt to reduce volatility and target multiple return sources.
Within approved guidelines and restrictions, the investment manager has
discretion over the timing and selection of individual investments. The Plans'
assets are currently held by the FCB trust department.
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair values of pension plan assets at December 31, 2020 and 2019, by asset class are as follows:
December 31, 2020
Quoted prices in Significant Significant
Active Markets Observable Nonobservable Actual %
for Identical Inputs Inputs of Plan
(Dollars in thousands) Market Value Assets (Level 1) (Level 2) (Level 3) Target Allocation Assets
Cash and equivalents $ 37,913 $ 37,913 - - 0 - 5% 3 %
Equity securities 30 - 70% 77 %
Common and preferred stock 144,924 144,924 - -
Mutual funds 559,472 559,472 - -
Exchange traded funds 248,819 248,819 - -
Fixed income 15 - 45% 20 %
U.S. government and
government agency
securities 90,292 - 90,292 -
Corporate bonds 154,135 - 154,135 -
Total pension assets $ 1,235,555 $ 991,128
$ 244,427 $ - 100 %
December 31, 2019
Quoted prices in Significant Significant
Active Markets Observable Nonobservable Actual %
for Identical Inputs Inputs of Plan
Market Value Assets (Level 1) (Level 2) (Level 3) Target Allocation Assets
Cash and equivalents $ 10,974 $ 10,974 $ - $ - 0 - 5% 1 %
Equity securities 30 - 70% 73 %
Common and preferred stock 142,157 142,157 - -
Mutual funds 565,343 565,343 - -
Fixed income 15 - 45% 23 %
U.S. government and
government agency
securities 78,175 - 78,175 -
Corporate bonds 122,370 - 122,370 -
Mutual funds 25,288 25,288 - -
Alternative investments 0 - 30% 3 %
Mutual funds 31,765 31,765 - -
Total pension assets $ 976,072 $ 775,527 $ 200,545 $ - 100 %
Cash Flows
The following are estimated payments to pension plan participants in the
indicated periods:
(Dollars in thousands) Estimated Payments
2021 $ 38,660
2022 41,340
2023 43,777
2024 46,161
2025 48,343
2026-2030 269,256
401(k) Savings Plans
Certain employees enrolled in the defined benefit plan are also eligible to
participate in a 401(k) savings plan through deferral of portions of their
salary. For employees who participate in the 401(k) savings plan who also
continue to accrue additional years of service under the defined benefit plan,
FCB makes a matching contribution equal to 100% of the first 3% and 50% of the
next 3% of the participant's deferral up to and including a maximum contribution
of 4.5% of the participant's eligible compensation. The matching contribution
immediately vests.
At the end of 2007, current employees were given the option to continue to
accrue additional years of service under the defined benefit plans or to elect
to join an enhanced 401(k) savings plan. Under the enhanced 401(k) savings plan,
FCB matches up to
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 100% of the participant's deferrals not to exceed 6% of the participant's eligible compensation. The matching contribution immediately vests. In addition to the employer match of the employee contributions, the enhanced 401(k) savings plan provides a required employer non-elective contribution equal to 3% of the compensation of a participant who remains employed at the end of the calendar year. This employer contribution vests after three years of service. Employees who elected to enroll in the enhanced 401(k) savings plan discontinued the accrual of additional years of service under the defined benefit plans and became enrolled in the enhanced 401(k) savings plan effective January 1, 2008. Eligible employees hired after January 1, 2008, are eligible to participate in the enhanced 401(k) savings plan. FCB recognized expense related to contributions to the 401(k) plans of $35.6 million, $30.8 million and $28.6 million during 2020, 2019 and 2018, respectively. Additional Benefits for Executives, Directors, and Officers FCB has entered into contractual agreements with certain executives providing payments for a period of no more than ten years following separation from service occurring no earlier than an agreed-upon age. These agreements also provide a death benefit in the event a participant dies prior to separation from service or during the payment period following separation from service. FCB has also assumed liability for contractual obligations to directors and officers of previously acquired entities. The following table provides the accrued liability as of December 31, 2020 and 2019, and the changes in the accrued liability during the years then ended: (Dollars in thousands) 2020
2019
Accrued liability as of January 1 $ 45,295
$ 34,063
Liability assumed in theBiscayne Bancshares acquisition -
1,138
Liability assumed in theFirst South Bancorp acquisition -
1,067
Liability assumed in the Entegra acquisition -
9,738
Discount rate adjustment 1,719
1,574
Benefit expense and interest cost 3,503
2,396
Benefits paid (7,862)
(4,681)
Accrued liability as of December 31 $ 42,655
$ 45,295
Discount rate at December 31 2.76 %
3.46 %
Other Compensation Plans
FCB offers various short-term and long-term incentive plans for certain
employees. Compensation awarded under these plans may be based on defined
formulas, performance criteria, or at the discretion of management. The
incentive compensation programs were designed to motivate employees through a
balanced approach of risk and reward for their contributions toward FCB's
success. As of December 31, 2020 and 2019, the accrued liability for incentive
compensation was $68.2 million and $57.0 million, respectively.
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE R
LEASES
The following table presents lease assets and liabilities as of December 31,
2020 and 2019:
(Dollars in thousands) Classification December 31, 2020 December 31, 2019
Assets:
Operating Other assets $ 68,048 $ 77,115
Finance Premises and equipment 6,478 8,820
Total leased assets $ 74,526 $ 85,935
Liabilities:
Operating Other liabilities $ 68,343 $ 76,746
Finance Other borrowings 6,308 8,230
Total lease liabilities $ 74,651 $ 84,976
The following table presents lease costs for the years ended December 31, 2020
and 2019. Variable lease cost primarily represents variable payments such as
common area maintenance and utilities recognized in the period in which the
expense was incurred. Certain of our lease agreements also include rental
payments adjusted periodically for inflation. While lease liabilities are not
remeasured as a result of these changes, these adjustments are treated as
variable lease costs and recognized in the period in which the expense is
incurred.
(Dollars in thousands) Classification 2020 2019
Lease cost:
Operating lease cost (1) Occupancy expense $ 15,023 $ 16,094
Finance lease cost:
Amortization of leased assets Equipment expense 2,168 1,975
Interest on lease liabilities Interest expense - Other borrowings
220 259 Variable lease cost Occupancy expense 3,231 2,394 Sublease income Occupancy expense (350) (390) Net lease cost $
20,292 $ 20,332 (1) Operating lease cost includes short-term lease cost, which is immaterial.
The following table presents lease liability maturities in the next five years and thereafter: (Dollars in thousands) Operating Leases Finance Leases Total 2020 $ 12,865 $ 2,159 $ 15,024 2021 11,757 1,876 13,633 2022 9,980 993 10,973 2023 8,146 617 8,763 2024 5,223 635 5,858 Thereafter 32,045 431 32,476 Total lease payments $ 80,016 $ 6,711 $ 86,727 Less: Interest 11,673 403 12,076
Present value of lease liabilities $ 68,343 $ 6,308
$ 74,651
The following table presents the remaining weighted average lease terms and discount rates as of December 31, 2020:
Weighted average remaining lease term (years): December 31, 2020
Operating 9.2
Finance 4.0
Weighted average discount rate:
Operating 3.14 %
Finance 3.08
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)The following table presents supplemental cash flow information related to leases for the years ended December 31, 2020 and 2019:
Year ended December 31
(Dollars in thousands) 2020 2019
Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases
$ 14,237 $ 15,703
Operating cash flows from finance leases 220 259
Financing cash flows from finance leases 1,922 1,850
Right-of-use assets obtained in exchange for new operating lease liabilities
4,595 17,837
Right-of-use assets obtained in exchange for new finance
lease liabilities - 1,886
NOTE S
TRANSACTIONS WITH RELATED PERSONS
BancShares has, and expects to have in the future, banking transactions in the
ordinary course of business with directors, officers and their associates
("Related Persons") and entities controlled by Related Persons.
For those identified as Related Persons as of December 31, 2020, the following
table provides an analysis of changes in the loans outstanding during 2020 and
2019:
Year ended December 31
(dollars in thousands) 2020 2019
Balance at January 1 $ 145 $ 199
New loans 19 5
Repayments (47) (59)
Balance at December 31 $ 117 $ 145
The amounts presented exclude loans to Related Persons for credit card lines of
$15,000 or less, overdraft lines of $5,000 or less and intercompany transactions
between BancShares and FCB.
Unfunded loan commitments available to Related Persons were $2.6 million as of
December 31, 2020 and 2019.
During the years ended December 31, 2020 and 2019, BancShares repurchased 45,000
and 100,000 shares, respectively, of its outstanding Class A common stock from
Ella Anna Holding, as trustee of her revocable trust. Mrs. Holding is the widow
of BancShares' former Executive Vice Chairman, Frank B. Holding, and the mother
of Frank B. Holding, Jr. and Hope H. Bryant, BancShares' Chairman and Chief
Executive Officer and Vice Chairman, respectively.
NOTE T
COMMITMENTS AND CONTINGENCIES
To meet the financing needs of its customers, BancShares and its subsidiaries
have financial instruments with off-balance sheet risk. These financial
instruments include commitments to extend credit and standby letters of credit.
These instruments involve elements of credit, interest rate or liquidity risk.
Commitments to extend credit are legally binding agreements to lend to
customers. These commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity requirements.
Established credit standards control the credit risk exposure associated with
these commitments. In some cases, BancShares requires collateral be pledged to
secure the commitment, including cash deposits, securities and other assets.
Standby letters of credit are commitments guaranteeing performance of a customer
to a third party. These commitments are primarily issued to support public and
private borrowing arrangements, and their fair value is not material. To
mitigate its risk, BancShares' credit policies govern the issuance of standby
letters of credit. The credit risk related to the issuance of these letters of
credit is essentially the same as those involved in extending loans to clients
and, therefore, these letters of credit are collateralized when necessary.
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)The following table presents the commitments to extend credit and unfunded commitments as of December 31, 2020 and 2019:
(Dollars in thousands) 2020 2019
Unused commitments to extend credit $ 12,098,417 $ 10,682,378
Standby letters of credit 129,819 99,601
BancShares and FCB have investments in qualified affordable housing projects
primarily for the purposes of fulfilling Community Reinvestment Act requirements
and obtaining tax credits. Unfunded commitments to fund future investments in
affordable housing projects totaled $53.7 million and $70.0 million as of
December 31, 2020 and 2019, respectively, and were recorded within other
liabilities.
BancShares and various subsidiaries have been named as defendants in legal
actions arising from their normal business activities in which damages in
various amounts are claimed. BancShares is also exposed to litigation risk
relating to the prior business activities of banks from which assets were
acquired and liabilities assumed in merger transactions. Although the amount of
any ultimate liability with respect to such matters cannot be determined, in the
opinion of management, any such liability will not have a material effect on
BancShares' consolidated financial statements.
NOTE U
PARENT COMPANY FINANCIAL STATEMENTS
Parent Company
Condensed Balance Sheets
(Dollars in thousands) December 31, 2020 December 31, 2019
Assets
Cash and due from banks $ 49,716 $ 4,573 Overnight investments 1,607 2,547 Investments in marketable equity securities 91,680 82,333 Investment securities available for sale 2,010 3,015 Investment in banking subsidiaries 4,621,676 3,763,947 Investment in other subsidiaries 3,241 3,555 Due from subsidiaries 786 - Other assets 48,591 45,164 Total assets $ 4,819,307 $ 3,905,134 Liabilities and Shareholders' Equity Subordinated debentures $ 452,350 $ 105,677 Other borrowings 128,125 201,702 Due to subsidiaries - 1,670 Other liabilities 9,564 9,901 Shareholders' equity 4,229,268 3,586,184 Total liabilities and shareholders' equity $
4,819,307 $ 3,905,134
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Parent Company
Condensed Income Statements
Year ended December 31
(Dollars in thousands) 2020 2019 2018
Interest and dividend income $ 3,952 $ 1,327 $ 1,362
Interest expense 16,817 7,187 5,154
Net interest loss (12,865) (5,860) (3,792)
Dividends from banking subsidiaries 229,685 149,819 242,910
Marketable equity securities gains (losses), net 29,395 20,625 (7,610)
Other income 574 257 347
Other operating expense 13,168 9,497 11,127
Income before income tax benefit and equity in
undistributed net income of subsidiaries 233,621 155,344 220,728
Income tax expense (benefit) 879 892 (5,184)
Income before equity in undistributed net income of subsidiaries
232,742 154,452 225,912
Equity in undistributed net income of subsidiaries 258,981 302,919 174,401
Net income 491,723 457,371 400,313
Less: Preferred stock dividends 14,062 - -
Net income available to common shareholders $ 477,661 $ 457,371 $ 400,313
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FIRST CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Parent Company
Condensed Statements of Cash Flows
Year ended December 31
(Dollars in thousands) 2020 2019 2018
OPERATING ACTIVITIES
Net income $ 491,723 $ 457,371 $ 400,313
Adjustments
Undistributed net income of subsidiaries (258,981) (302,919) (174,401)
Net amortization of premiums and discounts 824 119 88
Marketable equity securities (gains) losses, net (29,395) (20,625) 7,610
Gain on extinguishment of debt - - (160)
Realized gains (losses) on investment securities
available for sale, net - (20) -
Net change in due to/from subsidiaries (2,456) (2,185) (381)
Change in other assets (3,074) (2,001) 3,657
Change in other liabilities (694) 981 (2,595)
Net cash provided by operating activities 197,947 130,721 234,131
INVESTING ACTIVITIES
Net change in loans - 100,000 (100,000)
Net change in overnight investments 940 2,162 14,091
Purchases of marketable equity securities (333,140) (26,166) (2,818)
Proceeds from sales of marketable equity securities 352,835 56,749 9,528
Purchases of investment securities - - (6,438)
Proceeds from sales, calls, and maturities of
securities 1,000 3,477 9,997
Investment in subsidiaries (422,500) - -
Net cash provided by (used in) investing activities (400,865) 136,222 (75,640)
FINANCING ACTIVITIES
Net change in short-term borrowings (40,277) 40,277 (15,000)
Repayment of long-term obligations (33,300) (3,575) (1,840)
Origination of long-term obligations - 165,000 -
Net proceeds from subordinated notes issuance 345,849 - -
Net proceeds from preferred stock issuance 339,937 - -
Repurchase of common stock (333,755) (453,123) (163,095)
Cash dividends paid (30,393) (18,137) (16,779)
Net cash provided by (used in) financing activities 248,061 (269,558) (196,714)
Net change in cash 45,143 (2,615) (38,223)
Cash balance at beginning of year 4,573 7,188 45,411
Cash balance at end of year $ 49,716 $ 4,573 $ 7,188
CASH PAYMENTS FOR:
Interest $ 13,338 $ 7,187 $ 5,154
Income taxes 106,618 78,345 73,806
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